The institutionalisation of customer service

Speech by Martin Wheatley - Managing Director, Conduct Business Unit at the Chartered Institute for Securities & Investment

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Customer service – a proud City tradition

It’s a pleasure and privilege to join everyone tonight. A pleasure because, as a regulator, it’s simply nice to be asked out anywhere in the evening… so thank you.

A privilege because I know the Chartered Institute of Securities and Investments (CISI) is a great advocate for responsible, principled client management.

And it’s that focus on integrity, that focus on client interests, that I specifically want to address tonight. How do financial regulators encourage better customer service? Why is it so important? How should firms, particularly in wealth management, be treating their customer fairly in the new regulatory environment?

As we look ahead, these are crucial questions and our answers to them will be profoundly important.

Attention to customer service has been one of the great trademarks of our financial services. Directing business and investment to the City. Transforming London into one of the world’s most innovative economic centres.  

In fact, nearly all the most important drivers of financial progress over the centuries – the first regulated stock exchange; the first exchange for trading derivatives; underwriting; bank cards; cash points; NatWest piggybanks; you name it – all were founded on the professionalism and innovation of UK financial services.

This is a proud tradition. It’s an important tradition. It’s also, as we can see from the many headlines about financial scandal splashed across our morning papers, one of the few traditions in our world that is more important today than it was yesterday.

Public expectations of conduct are at levels you simply could not have imagined ten years ago.

We expect iPhones to perform amazing mathematical gymnastics with a swipe of the finger. We expect Amazon to recommend books for us that we didn’t even know existed. We expect to video-conference colleagues on the other side of the planet using hairs-breadth fibres running along our ocean floors. 

The best firms, the most successful firms, the most trusted, are the ones that take customers seriously in this environment of expectation. The ones that understand the currency of trust in generating business.

If financial services want to grow, if they want to restore the City’s reputation for excellence, this is the lead they must follow. Customer focus has to become a bread and butter staple of financial services.


It’s certainly encouraging to see the first steps being taken. To see some of our largest financial firms making very public commitments to their customers.

And I want to make it very clear tonight that I don’t, for one second, doubt the determination, or sincerity, of major banks to learn the unfortunate lessons of PPI, LIBOR and other, multiple, financial scandals.

But, as Benjamin Franklin once said, ‘well done is better than well said’ and it’s a worry that some staff, in some financial services, are still not reporting any significant change in culture, despite encouraging noises from the top.

So, there’ll be no hint of any regulatory complacency in 2013. I don’t believe better customer focus is yet an industry-wide crusade.

I certainly don’t believe every board ‘gets it’ yet. I don’t believe they understand what treating customers fairly actually looks like.

Is it just about a call centre picking up the phone within three rings? Is it just about answering a letter or email in 24 hours? Is it simply doing the bare bones: anti-money laundering and know your customer?

Or is it something different? Is it about actively promoting consumers and clients? Understanding their requirements. Placing their interests at the heart of your business.

Despite what I’ve heard some people say, banks and financial services are not like supermarkets. They’re not selling obviously over-ripe fruit and veg, prawn sandwiches past their sell by date, or iffy lasagnes... Items that customers can easily understand are poor investments.

They’re advising on expensive, complex, potentially life-altering products that reach maturity in five, ten or 15 years’ time. Often long after the first contact between adviser and consumer.

The changing face of the FSA

Now, this places a unique responsibility on financial services. A responsibility to shepherd investments professionally. A responsibility to provide customers with products because they’re suitable for their needs in the long term, not just because they improve the balance sheet in the near term.

It also places a responsibility on regulators to understand human behaviour better; to promote ethics more imaginatively; to spot future conduct issues more quickly.

And it’s a challenge that the new Financial Conduct Authority (FCA) will take up when we start work in three weeks’ time.

I’m interested in how we can make more use of behavioural economics – the study of how we all make financial decisions and the effects these have. 

Better understanding of whether and why consumers make mistakes, and which choices are difficult, will help make us a better regulator.  It can help us judge the level of protection consumers need and the most effective and appropriate way to intervene. Sometimes it will be the gentle ‘nudge’, such as changing the wording on terms and conditions. At other times it will be through stronger action. 

The most visible change that you will see will be our supervision of your firms. FCA supervision will be more forward-looking, more focused on where your firm is heading and more willing to step in if needed. 

Sitting behind this will be a new Policy, Risk and Research Division that will help us to spot issues sooner, to analyse them more intelligently, and to prioritise them better. One of its roles will be to build on our strong mandate to promote effective competition in the interests of consumers.

We will have a wide range of tools to promote competition. From general rule-making powers, such as requiring firms to submit information to price comparison websites, to firm-specific orders, such as requiring a firm to change practices that prevent switching, or to cease or divest certain operations. We will also be able to refer issues to the OFT.

And next year we will begin our regulation of consumer credit – easily doubling the number of firms we are responsible for.

And all of this means change.

It means the FCA will be behaving differently from City watchdogs of the past. We won’t be captured by rulebooks and procedure. We’ll be far more focused in future on the consumer. Putting the customer at the heart of everything we do, and expecting the same attitude from firms.

One of the features of regulation historically was that it was all about compliance. Were a particular set of rules followed? Could a firm demonstrate and document that it had followed those rules to the letter?

This created a cottage industry out of compliance – but did not necessarily lead to good outcomes. Indeed, Oliver Wyman released a report last year talking about firms’ ‘obsession’ with compliance; their tendency to follow the letter of the law rather than its spirit.

In the new regulatory environment, we’ll be taking a much broader approach to regulation. Not only in the retail markets. The markets where the most noise has been made. The most damage done to reputation. But in securities. In asset management. In wealth management.

So, where we used to devote most of our attention to big ticket issues like market manipulation, like the stability of market infrastructure, we’ll now look more widely to protect consumers. Placing more emphasis on the fair treatment of counterparties. Placing more emphasis on creating a level playing field for market participants. 

In other words, markets should expect stones to be turned over in the less well tended parts of the financial garden.

The FCA will be more willing to intervene in a greater and wider range of client relationships.

We will be strengthening some of the key chapters of client asset rules, like CASS 7 on client money, CASS 6 on custody assets and CASS 7A on distribution rules.

And we’ll be working to act more quickly, more decisively, in recognised investment exchanges: with simplified procedures for directing or removing recognition, as well as powers to require the appointment of skilled persons.

On top of this, we’ll be looking to support the UK’s primary markets better by increasing the intensity of sponsor supervision and looking closely, very closely in fact, at corporate governance structures to make sure there is complete confidence in the quality of the UK listing regime.

These are important changes. They will make a difference. But they also demand a change in attitude among firms. The FCA will, increasingly, look at where business or products are going – and be having an early conversation if we suspect the wrong outcomes are likely.

And when we do have these conversations, I expect CEOs and boards to react; not to send in a troupe of lawyers like a scene from A Few Good Men, to tell us that we need to do more file reviews, or to justify what the management know is ethically wrong.

Consumers, whether we’re talking here about bank account holders, other regulated firms or even an exchange operator like the LSE, deserve to be treated fairly, openly and honestly.

Wealth managers

So boards need to look into the corporate mirror and deliver candid assessments on their products. Good morals are not an infinitely elastic concept.  In business or any other part of our lives. Chairs, chief executives and directors should be asking whether products are suitable for the customers they are pitched at. Do they advance their interests?

If they can’t answer ‘yes’ to both questions, those products will almost certainly be attracting regulatory attention in future. Prompting questions and scrutiny.

Historically, UK firms operating in the wealth and asset management space have been able to answer ‘yes’. Earning themselves a reputation for professionalism and principles.

So, it is good to see the CISI, under the leadership of Alan Yarrow (CISI chairman), Simon Culhane (CISI chief executive) and Ruth Martin (CISI managing director) taking responsibility to promote these values. And I’m genuinely pleased to hear you’re taking the step of requiring candidates to sit, and pass, an online ‘integrity’ test before they can sit your exams. But we should not expect the CISI to have to go it alone.

This is a sophisticated industry. It is a complex industry. It is a lucrative industry, with wealth managers responsible for trillions of pounds in funds in the UK alone. The FSA has a responsibility to protect those clients, and to support CISI members, by making sure high standards of customer service are maintained across the sector.

One of the major concerns I have, one of the concerns the FSA has, is that there are wealth managers in the industry who can’t hold their hands up and genuinely claim to be providing a great service to their customers.

I don’t for one minute think we’re talking about a huge majority here. But the evidence tells us that some managers are failing to gather and record basic, up-to-date information from clients: their objectives; their capacity for loss; their liquidity requirements; their time horizons. All pretty standard stuff.

And we also know there are managers and firms in the industry placing money into portfolios that simply don’t match the appetite for risk of their investors.

I’ve heard of elderly widowers with zero knowledge of investments, and no other assets to their names, being placed in risky investment portfolios despite specifically requesting low risk.

I’ve heard of investors with strong religious beliefs explicitly asking for their assets to be invested ethically, away from areas like armaments, tobacco, gambling, oil or other environmentally-grey areas. Only for their money to be immediately buried in alcohol and oil investments.

I’ve heard of clients being urged to transfer self-invested pensions into discretionary investment portfolios so they can, apparently, manage their risk better. Only for FSA investigators to be greeted with blank expressions when they ask why the risk profile has leapt so high.

So there is work to do here. We need to hear more managers asking the right questions to their clients. What is your appetite for risk? What capacity of loss are you able and willing to take? Do you expect income or growth? What are your targets?

The best firms, the best wealth managers, of which there are many, are already doing this. They have already started to turn the ship around.

In fact, since the FSA started its official investigation into the sector in 2010, we’ve seen firms improve staff training, documentation, information gathering and handling of new clients. All very positive steps.

But the plain fact is it only takes a small number of unprofessional operators in a professional operation to damage credibility.

So the preliminary results of our latest review into the wealth management divisions of six retail banks are worrying. We’re worried that the FSA has picked up concerns both over the suitability of investment portfolios, as well as banks’ ability to demonstrate suitability, in a significant number of customer files they sent to us.

We are even more worried that the firms’ own compliance departments identified a much smaller number. There is a disparity there that suggests some compliance departments are not sufficiently switched on to concerns over suitability.

These kind of issues ask all of us to take a long, hard look at the circumstances in which they occur, and keep occurring.

Why are high-risk, unclear files not being picked up and dealt with by compliance teams? Why are firms not acting quicker to address back book issues? Why are some firms confusing clients with poor descriptions of the product or service on offer? Do CEOs, directors and boards have effective control over their wealth management divisions?

These are questions we all, and I do mean all, need to confront.

Learn the lesson

PPI is a £534m-a-month lesson in taking consumers seriously. Not so long ago, it was the golden goose of financial services. Banks were making 70% margins on the back of a product with a 0.15% claim ratio. Gross sales had reached around £56bn. PPI was a money-making machine, coughing out the pound coins faster than they could be picked up.

But when you looked across the market as a whole, when you look at the claims ratio, the profits and the sales incentives, PPI was quite clearly a disaster for customers and that’s why it’s become a disaster for banks.

The financial services industry should heed this lesson. Learn from its mistakes. As should regulators.

But we should also be aware that poor customer service is not always obvious or intentional. It is not usually deliberate. Increasingly, it’s simply caused by the failure of firms to deal with this environment of customer expectation.

Indeed, if you look to the high street, we see the clouds darkening over many of our biggest name firms because, rightly or wrongly, investors are worried. They are worried that these firms haven’t cultivated their online business quickly enough or imaginatively enough. They’re worried they haven’t responded to consumer demand. Hence the reason seven of the top ten most shorted FTSE companies are now major high-street brands.

No market is sacrosanct. No name is above reproach. And that’s why the wealth management industry needs to act in unison, with regulators, to clamp down on managers and firms that don’t take customer service seriously enough.

I want banks to put concerns over suitability to the top of their in-tray. I want them to take customers seriously. I want them to believe that regulatory changes are on the way, and to be ready for them. 


I also want all firms to know that we see this as a joint endeavour. The regulator’s role is to make markets work well and to support your clients. Not to undermine you.

We will be setting up a dedicated wealth management department within the FCA supervision area. I know this is something the wealth management industry has pushed for in the past. And I think it is a positive step. It will help increase and intensify the regulatory focus on wealth management.

But we need industry to apply pressure on the wound as well. The word we need in the back of our minds, at all times, is suitability. I want it pinned up on the walls of wealth management board rooms; meeting rooms; tea rooms. I want customer service to become institutionalised in this industry.

I am clear, the FSA is clear, and I know the CISI is clear, that great customer service – irrespective of the client’s wealth or financial sophistication – is the key driver for future growth.

We have many of the very best wealth managers, asset managers and wholesale markets in the world right here in this city. It’s one of the reasons London’s market share of markets like FX and OTC stands at more than 70%.

It’s the reason wealth managers are trusted to shepherd some £2 trillion in assets. It’s one of the reasons why this country has such a dynamic, diverse, distinguished tradition in financial services.

We should be very proud of this history. But we should also be aware of our responsibility to preserve it. The Patek Philippe ad slogan for watches: ‘You never actually own a Patek Philippe. You merely look after it for the next generation.’ Is not a bad one for us to keep in mind.

None of us in this room owns the good reputation of London’s financial services, but we should certainly be looking after it for those who follow in our footsteps.