Over the last decade, the concept of “service” seems to have disappeared from much of financial services.
Weve seen a number of scandals where the customer has been failed: PPI mis-selling, 110 per cent “Together” mortgages (secured on the high-risk basis that properties would automatically increase in value), Libor fixing, and banks taking advantages of small businesses in distress.
Weve also heard that, unless we change the culture in financial services, we are laying foundations for the next crisis.
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The common thread to all of those scandals was a lack of purpose. Financial services fulfil a limited number of essential functions: money and payments, storing value (such as bank deposits), financing (through lending or capital markets), and investment and risk management like insurance.
The people involved lost sight of what their products and services did beyond making money.
Cultural change is required to re-centre on purpose and proximity to the customer, and the time is right. Todays consumers expect business to have a sense of purpose, and their tolerance for scandals is wearing thin.
ICAEW has studied the conduct and culture that created this roll-call of shame, and what can be done to provide a blueprint for a better future.
One thing we have found is that, where behaviour is concerned, financial incentives are less influential than we might imagine.
Observers may think its all about bonuses, but our research found that conduct is often driven by desire for recognition.
With Libor fixing, people broke rules in order to be seen as part of a group – on one occasion, according to instant messages transcripts, rewarded not with money but day-old sushi. While banks have done away with sales targets, managers still know who sold what, and official recognition can give way to unofficial appreciation.
Environmental pressures are equally important. When the boss wants something “yesterday”, there is an incentive not to check it thoroughly. This may not incentivise malpractice, but it might prompt carelessness.
Second, commonly accepted financial targets may actually drive bad behaviour, for example return-on-equity (ROE), the metric used to judge banks success. Higher ROE targets mean lower costs, which means less investment in controls and training. It also means that staff feel they must prioritise profits above all else.
This leads to profitable but unhelpful products, sold to unwitting customers. At its worst, this could mean selling a customer insurance that they will never be able to claim against, like PPI.
We identified “free” banking, zero per cent balance transfers, and standard variable rate (SVR) mortgages as areas that may be of concern for regulators.
Free banking is subsidised by those who can afford it least (those currently in their overdrafts), zero per cent balance cards are marketed on the assumption that the balance wont be paid off before interest is charged, while SVR mortgages take advantage of customers who cant or dont know to switch to a lower rate.
So how can we change? Crucially, everyone within financial services needs to understand how what they do affects customers – whether they deal directly with them or not.
This is especially true at times of innovation, when it may not be universally clear how new products and services work – and that applies to fintech as much as incumbents.
While many new entrants claim to be all about the customer, this is hard to reconcile with a “free” service business model. While the cost in money may be low, do people realise that theyre paying in data?
Prioritising customer interest must be at the heart of financial services. This may mean less profit in the short term, but longer-term benefits of better relationships and an overall culture of integrity that can protect business reputation and safeguard against fraud or other misbehaviour.
Penalties for misconduct can act as a deterrent to a degree, but a clear sense of purpose will allow people in fast-paced dynamic industries to make instinctive decisions about what is the right thing to do.
Unless we see this come to the fore, we will experience more of the same – scandals we dont see until they hit us, hard.
Read more: From classroom to boardroom, trust is at the heart of the Citys agenda
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