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How the FCA plans to get retail banks to toe the line

john howard
John Howard

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


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. So, let’s see if I’ve got this. The way to stop the banks misselling is for us all to pay them more for using our money! Stop the world I want to get off!!

  2. It’s curious how Civil Servants always know how to run a business better than business people. Given that business people mainly earn more than Civil Servants one would assume that those Civil Servants would be desperate to cross the line, because with their infallible instinct for what works best they should make millions.
    Sorry, wrong way round. We should nationalise all the industries so that these Civil Servants can then ensure that the country benefits from the massive leap forward in business strategy – and sustainable business knowledge.
    With such an imaginative leap forward perhaps we should give Martin Wheatley a Lordship straight away!

  3. I have always been of the opinion that when I deposit money into a bank I am allowing them to use my money to make profits elsewhere. Why then would I ever want to pay a premium to then gain access to my own money? Perhaps if banks concentrated on actual banking, i.e. making the money they have on deposit work for them, then they wouldn’t be in the mess they have created for themselves and us. How many of the banks have found themselves in trouble due to being over leveraged?

  4. Very insightful. More articles like this please

  5. Julian Stevens 3rd April 2012 at 9:45 am

    An optImist (assuming there are any of us left) might interpret this as a carefully understated admission that the selling practices of the banks are WAY overdue for serious regulatory attention and that a bit of respite might at last be in prospect for the all but punch-drunk IFA sector. After all, all the data show that the IFA sector, whilst still far from perfect, poses by a considerable margin the smallest risks of consumer detriment.

    Selective light touch regulation (the tilted playing field about which we’ve complained for so long) is not only unjust but manifestly dangerous. This we’ve seen with the epidemic of MPPI mis-selling and the Barclays/Aviva debacle, the latter compounded by Barclays’ systematic policy of fobbing off complaints en masse. Is it not a shameful indictment of regulatory policy that complainants actually felt it necessary to demonstrate outside Parliament in an attempt to get the regulator to do its job and take action to force Barclays to treat its customers fairly?

    IFA’s aren’t asking for an easy ride, as the bad practices of the few are an unwelcome stain on the reputations of the many. But what we do feel entitled to is at least some recognition from the regulator that, by and large, we do much better jobs than our bank counterparts.

    Meanwhile, we struggle on in hope if not expectation, anticipating unhappily the arrival of the next invoice from the FSCS.

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