Jonathan Davis: Will shame force retail savings industry to clean up its act?

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The ink is barely dry on the announcement that the Government is to sponsor a study of the way the retail savings industry operates, and already the industry seems to be digging in its heels for a long and tiresome propaganda war. The Sandler enquiry, announced by the Treasury a couple of weeks ago, seems to be intended to do for the retail industry what the Myners report last year did for institutional investment, namely, to ask pertinent questions about the way the industry operates and hope a few people are shamed enough by the findings to make an effort to improve their act as a result. (This, I should add, is not the official version of events, but my partisan gloss on it.)

At the same time, the Financial Services Authority is continuing its painstaking and laborious efforts to define its soon-to-be statutory role as a champion of the retail investor ("soon-to-be" because two years after it set up shop the legislation formally establishing its powers has still not been through Parliament).

Last week the FSA unveiled yet another consultation document, this time aimed at defining what is meant by the concept of fairness in the provision of financial services and setting out its thoughts on how the industry might deliver a better service to consumers.

For this presumption, the FSA was promptly branded "the provisional wing of the Consumers' Association" by the Association of British Insurers, the industry trade association. The ABI's argument is that if the FSA continues to make so many strictures against the industry, it runs the risk of deterring people from saving, or making any pension provision. This is a feeble argument when you think about it, but one we will hear more of in the course of Mr Sandler's efforts.

The financial services business in this country is a great provider of employment and profit. But, as far as the retail market is concerned, it has long suffered from a serious inability to distinguish between the concepts of sales and service. There are many notable exceptions, but the attitude in the business has tended to be if it sells, it must be good. As long as customers are buying, in a competitive market, by implication, they must be getting what they need.

In business terms, this makes sense. Anyone with an iota of knowledge of business economics understands full well that £1 paid today for a bunch of fancy promises is worth more than £1 which you actually have to earn over a period of years. The financial services industry has tended to grow fat on the back of a business model that so often allows providers to be paid in cash today for "financial products" whose benefits are typically delivered over subsequent years. (Am I the only person to note the discordance between the way big financial service companies talk about themselves as product providers, but at the same time claim to be part of a service industry?)

With this incentive structure in place, it is no surprise that many financial services companies devote most of their energies to sales and marketing, and rather less to the tedious and humdrum business of making sure that what actually gets delivered is what they sold at the outset. To use the jargon of the industry, while the front office function tends to be sleek and glossy, the back office is frequently a black hole where the boring business of paperwork and delivery comes to grief amid a pile of unresolved customer grievances.

The long life of many financial products, such as pensions and mortgages, also creates another problem. This is an issue of accountability. Those who are left to take the flak and pick up the bill at the top of financial services companies when things go wrong are rarely those who were responsible for the dodgy sales practices or overpromising that caused the original trouble. The "pay now, deliver later" syndrome is one reason why insurance companies, the worst offenders in this respect, have always had to be regulated.

Although the FSA document veers in places towards motherhood, as such exercises often do, it is actually not a bad snapshot of the problems retail customers have when it comes to financial services. (Go to if you want to read it.) A fundamental part of the problem is that most of us are ignorant or casual about money matters, and that creates a climate in which bad practices, such as misselling, can more easily flourish.

The FSA cites in its research findings that two out of three people rely on a single information source rather than shop around when making financial decisions. Fifty per cent of a group they surveyed agreed with the statement that "life is too short to worry about saving a few pounds here or there" (when the cost of poor decisions can easily run into thousands over the lifetime of a mortgage or a pension). Inertia is rife, and few people are prepared to pay for advice. Long term, the only answer to this is improved investor awareness.

But even the industry itself must surely put its hand up and acknowledge some of the other difficulties. Can anybody seriously look at the advertising efforts of banks, insurers and fund managers, for example, and deny that they are designed to raise unwarranted expectations? I don't think so. Sure, you can say, "more fool you" to people who fall for the kind of breast-beating stuff that goes to make up the typical financial advertisement. But many who sell investment products surely know, if they have any conscience, that the basic promise at the heart of what they are selling is frequently overstated. Another point the FSA makes, which seems unanswerable to me, is that many providers think the job of communicating is largely done once the customer has signed. By their nature most financial products are designed for intermediate risk. Financial risk arises because personal circumstances and overall economic conditions are prone to change. We live in an uncertain world.

Yet few banks, insurance companies and mortgage lenders monitor how these changing circum- stances might have affected those to whom they have sold products; in fact, more often than not (look at the way banks manage their interest rates on savings accounts), they aim to profit from the inertia of their own customers in the face of market volatility. In addition, many products – notoriously personal pensions and endowment policies – are designed in such a way that they often penalise those who try to change them when circumstances change.

I doubt very much whether the Sandler enquiry will result in any immediate or dramatic changes in the way that the retail savings industry operates.

I believe that statutory regulation of the industry would be a disaster that would serve nobody well; nor do I have a lot of time for the consumer movement. But I do hope that the industry stops whingeing and blathering, and instead makes a serious attempt to confront the issues that are raised by what are repeated and systematic failures to deliver to users what they so blithely promise at the point of sale.