Consumer protection on the agenda
My interest in consumer protection (and self-protection), which is what got the No Monkey Business project started, was fed with three items in the last few days. They have aggravated my frustration that people who should know better are still not framing the public policy issues properly.
Two deal with skills, which I would love to see improved but actually have very little to do with the industry’s appalling record of monkey tricks. And skill-raising across the board pushes the government even further from their objective of cheap and easy access to financial advice in the mass market. The third was the deliberately headline catching new policy of the Conservatives to ‘abolish the FSA’. They need to tell us lot more about how that will improve both prudential supervision and consumer protection.
First, I was asked to serve on the ‘packaged products’ working group determining the scope of the new exams required for financial advisers from the start of 2013. I declined. The whole process is already beyond the atage at which I can usefully influence outcomes. Besides, I do not understand the significance of packaged products except that they mark one of the wrong turns made by regulation when we first introduced it. Unfortunately the Financial Services Skills Council is stuck with the FSA’s existing framework for rule making even though it is out of date and unhelpful.
Second, the Financial Services Consumer Panel’s annual report tells me this week that advisers need to be as well qualified as other professions like doctors and lawyers, which is way above the exam threshold I would have been discussing, and at the same time it tells me that advice should be much cheaper. We are not a profession and the challenge is to make access to advice and investments easier and cheaper. The economics involve manufacturing and distribution and the solutions almost certainly rely on distributed knowledge through technology, not through an advice profession. The Government can make the largest single contribution by making taxation and benefits simpler and so reducing the need for advice. The rest needs an industrial solution. Personal Accounts, and stakeholder pension before them, are good examples of how government can frame and help encourage better industrial solutions.
The Consumer Panel rightly slates banks. But a key point about banks is that their record in giving poor and unsuitable advice has very little to do with skill levels and is mainly to do with what senior management tell their staff to do. Raising skills will do nothing to help the public until bankers stop creating incentives to sell poorly-designed and poor-value products.
By contrast, the record of the advice industry which emerges from the Financial Ombudsman Service and (before that) the review of pension misselling suggest that its present skill level, though lower than required after 2012 and lower than the Consumer Panel wants to see, has not obviously caused consumer harm.
There are areas in which ignorance (in particular) of economics, and ‘economic realities’ underlying financial planning issues, as well as ignorance of investment principles and evidence of returns and where they come from, have led systematically to worse outcomes for consumers, through inappropriate risk taking and excessive costs. I could equally well point at a general lack of awareness of utility theory that handicaps household financial advice. But none of these will change very much when the exam syllabus is set, you can be sure.
That is why I would rather see a hierarchical approach to knowledge, formed at a high level and distributed down through organisations to the points of contact with the public. In such a structure, too much knowledge at the lower levels is actually harmful as it tends to reduce the applied level of skills to the lowest common denominator. The hierarchical approach is already the dominant model in large organisations. The example I gave of banks’ strategy for product distribution is exactly that sort of model. It just happens to be one being used to maximise the bank’s margins not suitability for its customers.
The third item this week was the Conservative policy decision (or is it only kite flying?) to ‘abolish the FSA’ (or was it only a sound bite for the Andrew Marr Show?) and replace it with a Consumer Protection Agency, as well as returning bank supervision to the Bank of England (Shadow Chancellor Osborne did not say who would supervise insurance, IFAs and fund managers, by the way).
Regulatory fatigue has already spread faster than swine fever so I doubt if anyone working in financial services welcomes yet another upheaval. But I suppose there may be some logic somewhere in separating prudential supervision from consumer protection, and if you removed the supervisory functions of the FSA there would be not much left that was not ‘wholesale’ except the consumer protection bits. And I dare say the Conservatives’ ideas about both protection and self-protection might just be more effective than the FSA’s Treating Customers Fairly initiative, which does at least aim to alter the harmful behaviour in the board room that then gets distributed through organisations by perverse incentives.
I suppose I should try to separate my own exhaustion with regulatory change, as a business manager, from my enthusiasm for radical initiatives in consumer protection that focused on product design but otherwise left markets alone. I should try but even writing this paragraph makes me suddenly feel 113 so I must stop here.