This article was written for Mindful Money in January 2012. They seem to have taken it off their site, but I think it is still relevant. I wrote it for them rather than putting it here originally because it’s more about “National” than personal finance. However in terms of regulation of what is sold to people, and how bankers are remunerated (from our money), it applies to the Taming the Pound idea of helping people help themselves to control their money.
There was an interesting piece of rhetoric from Martin Wheatley, the head of the new Financial Conduct Authority (FCA). He was speaking to the British Bankers Association (http://m.ifaonline.co.uk/ifaonline/news/2141304/fca-chief-banks-advice-sales-targets). He set out his wishes for a (utopian) situation where the banks would be the customers’ friend and not sell them inappropriate products.
It’s nice in a way that he’s trying to do this. It fits in with the desire for honesty etc.
But is it realistic, does it address any real problems and does it recognise that he and his organisation (and the predecessor, the FSA) are a large part of the problem? (http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/9044670/Has-the-outgoing-Financial-Services-Authority-scored-one-last-own-goal.html)
If we’re going to have talks about banks going back to the “bank manager in the cupboard”, the small businessman’s friend etc., lovely. How exactly is that going to happen? What is the reward system for banks?
It’s based on making money – that’s what businesses are supposed to do. If banks give “free” advice (like they used to) it isn’t free, it comes out of the bank charges for cheque books etc. If you have free cheque books etc. the bank has to get its money from somewhere, and it can’t give “free” advice.
When we went over to the concept of the bank branch as a “sales unit” (and the model became one of paying for buying products and services, rather than everybody effectively paying a fee to have an account that got them “free” services that they could use), the set up changed.
I was actually working for the independent finance arm of a major bank in the late 1980’s. Part of my job was training the bank staff about what was possible to do beyond the products the bank wanted to sell. They got double commission on selling the in-house products – to encourage staff to sell the bank stuff rather than pass it to us to broker it for the best deal in the market.
Still, the bank staff wanted to call us in, because they saw their role as being to help the customer. They didn’t really know insurance and investment etc. they knew banking. They wanted to open accounts, do what they were good at, and then pass the other stuff on to somebody who was trained to do it. They saw themselves as good at customer service and were leaving in droves because “I joined the bank to help customers not to be a salesman”
The model is now to sell things, not provide a “free” service (for which they charge in regular fees).
How do the banks go back to being something they haven’t been for thirty years or more? Mr. Wheatley doesn’t say.
The response from Independent Financial Advisors (as you can see from comments on some of the links, and I get first hand from friends still in that field) is that, naturally, the banks won’t give decent quality advice anyway (that’s also picked up in the Telegraph article http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/9044670/Has-the-outgoing-Financial-Services-Authority-scored-one-last-own-goal.html)
I’ve got a certain sympathy with that – after all, I did the IFA job for about 14 years.
The level of technical competence that IFAs have to have from this year, I got in 1992/3 (when the qualification came out). The banks’ staff don’t even have to have that, from what I can make of the regulations.
It was the case in the 80’s through to today that you can have “specialists” who only learn one product, or family of products. They can sell one company’s policies, meaning that it is OK if the policy is absolute rubbish as long as it is the best the company does.
It used to go even further towards lunacy, maybe it still does, and one could learn just mortgages, or just investment-linked life policies or something.
If you target people to sell specific products, people react as they usually do. If the only tool you have is a hammer, all problems begin to look like a nail.
So you always got people (particularly the most limited, poorly trained people) selling rubbish.
Mr. Wheatley doesn’t want people to do that.
Might it therefore be a good idea for him to stop the limited and specialist idea, and make all people qualified and responsible for selling the best product in the market?
Appealing to bankers’ better nature is OK, but as they will lose their jobs if they give in to their better nature, don’t sell as much and don’t make any money, does Mr. Wheatley think that it is going to happen?
Part of the problem
Apart from the obsession with products and the – let’s say it, naiveté – of appealing to the bankers’ better nature, the FSA have set up another problem.
Successive heads of the FSA have been previously employed in banking (such as Lord Turner). Given that such a person is part of the “tribe” and probably has on speed dial the number of the person who is currently playing golf with at least one Director of any bank in question, according to small group theory – what is going to happen?
If you find somebody in your social group in an ethically questionable situation, do you immediately call the police and read your former best man’s good friend his Miranda rights? Or do you give them a bit of leeway, because you’re sure they wouldn’t be doing anything they shouldn’t?
Successive regulators seem to have been reluctant to be tough on banks, whether it is because of the “six degrees of separation” factor, fear of banks’ financial clout, the consideration that a remunerative non-executive director role will be lost if you drop them in it – I don’t know.
But I’m fairly sure that, for the reasons above, among others, giving lectures on morals to the banks is not terribly helpful. I would think it will be as practically useful as giving lectures on the moral imperative for hygiene and customer service to an NHS practice run by Dr. Shipman.