Since Sir Callum McCarthy’s 2006 “Is the present business model bust?” speech, I have heard many fine intentions expressed but I question how our collective actions and outcomes since then stand up to scrutiny.
McCarthy outlined the challenges of under-provision in UK savings and the depth of distrust in our industry among large sections of the population – an issue thwarted by the degree of complexity tolerated in our sector. He highlighted the new business “merry-go-round”, focusing on business volumes as a measure of success, rather than profitability and efficient capital management. He drew attention to the level of product and provider bias, poor product persistency and concerns over the potential for customer detriment. He also questioned the viability of the prevailing advisory model, based on profit margins and inconsistent professionalism.
I am not suggesting three years is sufficient time to overcome such deep-rooted issues. However, although some progress has been made and the current economic crisis may drive more, we could and should be doing better.
Life and pension providers continue to provide products profitable only if one accepts assumptions on persistency and unit costs of service which are ever more challenged in the world outside the actuarial department.
Advisory firms accept the importance of increased professionalism and of quality customer service but often remain wedded to antiquated business models.
Our desire for transparency and simplicity is obstructed by institutions with a self-interest in finding rationales for deferring either or both of those requirements.
Innovations capable of delivering business model improvements continue to be seen by the regulator through the prism of product regulation, constraining any positive impact.
Most damning of all, the lack of trust in our industry is an embarrassment to anyone passionate about the good we can do for our customers. Worse still, the scale of under-provision seems to be rising.
Adair Turner spoke of the big job the financial services industry has in rebuilding trust. He said more intensive regulation was unavoidable, given the loss of consumer confidence, and that this would not be restricted to the banking arena.
If we do not want an ever more dictatorial regulator, I suggest we rise to his challenge. Sustainable market solutions that build trust by overcoming fundamental model flaws requires a revolutionary commitment to cohesive action.
Paul McMahon is managing director of Axa Distribution Services