The recently published retail conduct risk outlook from the FSA is the first major publication from the regulator with Martin Wheatley’s signature on it.
Wheatley will head the new regulator, the Financial Conduct Authority, in about a year’s time. As the outlook is the FSA’s view of potential dangers up to 18 months ahead, does it give some clues to his thinking?
My interpretation is the FCA will concentrate far more on the retail sales of the banks as it expects the retail distribution review to sort out most of the worries about IFAs.
Wheatley’s foreword to the document gives little away but the accompanying press release is more forthcoming, in which he says: “Consumers rely on financial firms and their products to provide them with vital services – literally the means to run their lives.”
He recognises that, for most of us, the utility aspect of financial services – bank accounts, credit cards and insurance – is the most important. He goes on to say that consumers worry they “aren’t being sold the right products”, and the risk outlook will help firms “understand how to avoid the bear traps of designing products for maximum profit but little benefit to customers”.
This relates to research in the outlook document that says consumers see the banks as employing pushy sales tactics, regardless of a consumer’s situation, with the priority on the sale rather than service.
At the risk outlook launch, Wheatley is reported as saying that free banking is an “outmoded concept” that “doesn’t really work”. He went on to say that if the banks are providing free services, they are being subsidised elsewhere, in part by cross-selling.
The Independent Commission on Banking, chaired by Sir John Vickers, also identified cross-selling of high-margin products to subsidise wider service provision as a problem for the banks.
The argument then goes that this carries a big risk of misselling if incentives to staff encourage them to concentrate on the sale rather than suitability.
Bonuses and commission have also come under the FSA microscope and the regulator has just finished a year-long thematic study into financial incentives paid to direct salesforces, which decided that action is necessary.
The FCA seems to have concluded that the RDR will address past problems with independent advice and that banking is where it must now focus, targeting complex products that have been missold because of inappropriate incentives.
Wheatley’s preference looks like an end to free banking, with bank accounts realistically priced to make the basic business model sustainable and a clampdown on high bonuses paid to staff to sell riskier products.
This will mean less pressure on bank staff to cross-sell and on customers to buy. For IFAs, this may also go some way to redress the imbalances they see in the RDR.
John Howard is special adviser to Huntswood and former chairman of the Financial Services Comsumer Panel