Even though the principles of financial services consumer protection have been around in Asia for a number of years, there seems to be little desire to embrace the concepts of fair treatment as a strategic tool to reduce the risk of poor customer outcomes.
Some possible reasons for this could be:
• Low levels of enforcement
• A poor understanding of the benefits of a culture of fair treatment
• “Principle” based regulations are seen as less important.
However, make no mistake, “Treating Customers Fairly” (TCF) can add real quantifiable value to organisations that create and sustain a culture of fair treatment.
This series of articles, spread over the next few weeks, will provide readers with the following:
• A clear understanding of TCF and why it matters;
• Insights into the benefits of a TCF culture, and
• Identify the things businesses can do to get ahead of any future consumer regulation.
This will include a piece on “trust”; information on some of the financial implications of TCF; a global overview of TCF regulations, and finally, some of the steps and practical actions that can be taken to create a culture of fair treatment.
Let me say from the outset that the principles of fair treatment of customers are universal, so these articles will not focus on any one set of regulations.
I’m sure we all believe fair treatment is common sense – after all, we all want to be treated fairly. I’m sure we also agree that treating customers fairly reflects good ethical behaviour and good governance, both of which are important benchmarks for the shareholders in banks and financial services companies.
I know we would also agree that trust is fundamental to a successful business. However, recent independent research shows customers trust in financial services is lower than for many other industries.
In November 2012, Gallup produced some survey results to illustrate this.
Respondents were asked how they would rate the honesty and ethical standards of people in a broad range of different fields on a scale from very high to very low. In relation to bankers, the % of very high/high responses came in at just 28%. (Insurance sales people came in at just 15%, the highest for over 35 years)
By way of additional evidence, the results from the 2011, 2012, and 2013 “Global Trust Barometer Surveys” conducted by Edelman has banking and financial services at the bottom when asked the following question: “Please indicate how much you trust businesses to do what is right. The 9-point rating scale went from 1 - you “do not trust them at all” to 9 – you “trust them a great deal”.
So, from a customers’ perspective, it’s clear that trust in banking and financial services is in a pretty poor state. We might assume this stems from the scandals that have rocked the global financial industry in recent years, but there may be other, longer-term and deeper-rooted reasons behind it.
• Is it because financial products are intangible?
• It is because they are often long-term, such as life assurance policies, pensions or bonds?
• Is it because customers don’t know whether the product will work until they actually need it, and then if the product doesn’t do what the customer expects, the consequences are often quite severe?
• Or is it because even the simplest of banking products can contain over 25,000 words to just describe the features, benefits, terms and conditions, the result being that the customer is either “forced” to trust the sales person, or feels “forced” into the “just sign here” course of action?
It’s likely to be combination of all these issues, and there may well be others.
Costs and Benefits
So what are the financial consequences, (fines and compensation), when firms are found to have deceived and mis-led customers (intentionally or unintentionally)
This analysis published by KPMG last November provides some startling figures:
• In the US: US$25 billion on residential mortgage lending
• In the US: US$445 million on unfair, deceptive, abusive acts and practices
• In the UK: US$ 15 billion on miss-selling of payment protection insurance
• In HK: US$ 258 million to compensate Lehman Brothers investors
Organisations that have fallen foul of regulators include some of the biggest global firms - a quick search on the internet and you’ll find some very familiar names.
The UK has been particularly hard hit as a result of the PPI mis-selling scandal - not only have banks been fined for the mis-selling of these insurance products they are also being fined for not handling the resulting customer complaints and compensation claims in a fair and expedient way.
It seems that just being compliant with regulations won’t cut it anymore – firms need to be seen to treat customers fairly, and they need to be able to prove it
So much for the negative consequences, what about the monetary benefits of trust?
In 2008, the Director General of the UK Association of British Insurers produced a report on the “benefits of trust”. Even though this is UK research, it does provide a compelling argument on the financial benefits for all stakeholders… (All these are figures are presented in US dollars)
The report estimated that there would be an additional
• US$ 23.2 billion in additional premium from customers
• US$ 6 billion for the industry from bad debt reduction, reduced acquisition & reduced regulatory costs
• US$ 7.4 billion for the government from increased tax revenues.
In separate UK research conducted by the Association of Independent Financial Advisers, they calculated that a 25% uptake in customer engagement equated to almost USD 1 billion of new regular premium entering the industry.
In the language of an economist - trust makes economic sense because it reduces transaction costs.
But of course, there are also other benefits
• Public trust
• Demonstration of commitment to social and governance issues (Corporate Social Responsibility)
• Improved customer advocacy
To quote the former Chair of the US Federal Deposit Insurance Corporation:
“There can no longer be any doubt about the link between protecting consumers from abusive products and practices, and the safety and soundness of the financial system”
This very clearly sums up what Treating Customers Fairly (TCF) is all about and why it is so important, because it touches on a couple of the most fundamental principles behind TCF.
In the next article, we’ll take a closer look at these principles.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Stephen Rosling is Co-Founder and Director of TCF Matters, a new international training and consultancy firm specialising in the audit and implementation of consumer protection regulations. He has worked in the financial services sector for over 25 years.