Promoting fair and efficient markets and confident consumers

Consumers are increasingly expected to take responsibility for themselves by using financial markets to provide for the future or protect themselves against risk. But if we are to encourage greater take-up of financial products and avoid exacerbating financial exclusion and underprovision, then markets need to operate fairly and efficiently – and, importantly, markets need to be seen to be operating fairly and efficiently if consumers are to be confident that providers are acting in their interest. Moreover, the regulatory system has to enable financial inclusion and provision not act as another unnecessary barrier.

There are a number of strands to our work to promote fair and efficient markets that consumers have confidence in.

·         Co-production: we make a point of working with the industry to help it develop fair and transparent products and services that consumers value and have confidence in – what we call ‘co-production’. This work strand relates mainly to consumers who are viable for the market to serve; 

·         Effective legislation and regulation: we campaign for an effective and efficient legislative and regulatory regime (including self-regulation) that strikes a balance between protecting consumers and promoting efficient markets and financial inclusion; and

·         Innovation: working with the industry and other stakeholders to develop alternative ‘quasi-market’ solutions for consumers who are not commercially viable for mainstream providers.  

Working with the market

We campaign against poor practices in the market such as irresponsible lending or unfair product terms and conditions. However, we also take the view that consumer advocates can do as much good by 'co-producing' products and services with the industry - that is, working with firms to develop consumer-focused products and practices.

Where possible we believe that good practice should be rewarded to provide strong incentives for consumer-focused providers. So, over time, we plan to develop an independent, trusted quality mark to allow consumers to recognise consumer-focused firms. We take our inspiration from organisations such as the Fair Trade Foundation and the Soil Association who have shown how positive campaigns can help markets evolve to meet consumers needs and produce market changes.

Effective legislation and regulation

Effective, not more, regulation is paramount. Good regulation promotes consumer confidence and efficient markets. Ineffective regulation fails to protect consumers and undermines confidence, increases distribution costs and distorts competition.

To be fair to the financial services industry, part of the blame for short-termism that has hampered the capacity of the industry to provide long term sustainable solutions for consumers must be laid at the door of the regulators and the financial system itself. Regulators have tinkered with the retail distribution system and until now have been afraid to directly address the conflicts of interest caused by commission bias and aggressive remuneration.

Moreover, the financial system at the moment does not sufficiently reward firms that try to offer long term added value. The blame here lies with institutional shareholders, fund managers, and investment analysts who display an amazing lack of insight into how retail financial markets work. These powerful agents in the market have not undertaken due diligence in the past to understand the reputational damage caused by misselling  and failed to understand that the current commission based system is undermining the long term financial viability of the industry as it simply results in churning rather than real growth in new business. The behaviour of investment analysts and institutional investors means that most insurers have not been able to move away from the self-defeating distribution models that still prevail today. 

We are very pessimistic about the likelihood of the market ‘self-correcting’. Further interventions, not just by regulators, are needed to create the necessary conditions that reward consumer focused behaviour and penalise detrimental behaviour.

In terms of regulation, the FSA, therefore, needs to focus its efforts on two key objectives:

·         changing the market dynamics along the entire supply chain, not just at the point of sale, to promote effective competition; and

·         regulating more effectively the way the industry conducts business and the all important relationships and conflicts of interest between providers, distributors, and end-users, Critically, the FSA has to become a more effective enforcer of regulation.

We have developed a blueprint for better regulation consisting of:

• a small number of core, high level principles and targeted rules that set minimum standards and focus on the root causes of consumer detriment;
• tougher more transparent regulatory enforcement;
• a major streamlining of the regulatory rule book; plus
• the creation of standards boards to provide guidance on principles based regulation and some clarity of what treating customers fairly means in practice.

We are confident that our blueprint for regulation would lead to a more efficient regulatory regime, more competitive markets and better consumer protection standards.

Innovation

Even if the UK financial system had the most efficient regulatory system possible and competition was working perfectly, a large group of consumers would still be commercially unviable for mainstream financial services providers.

Radical and innovative solutions are needed to meet the needs of these groups. We are developing innovative solutions based on partnerships between the financial services industry and the third sector to increase access to fair and affordable financial services for consumers who are not economically viable for mainstream financial services providers, and aim to help build capacity in the third-sector to help it play a more effective role in meeting the needs of excluded and marginalised consumers. Some of the areas we are exploring include social investment bonds, affordable insurance products, and affordable equity release schemes.