A test of conscience

martin wheatley speech migration.jpg

Speech by Martin Wheatley, Chief Executive of the FCA, delivered at the British Bankers' Association 2015 event on consumer vulnerability. This is the text of the speech as drafted, which may differ from the delivered version.

The financial industry has, as we all know, come under significant pressure in the last few years to rediscover its sense of social purpose.

Vulnerability is an issue that should, clearly, be at the centre of that national debate.

So I’m grateful to the British Bankers’ Association (BBA) for providing us with this first, high profile platform since the financial crisis to move the discussion forward here.

As today’s report makes clear – consumer vulnerability has become a key test of conscience for the City, as well as a rapidly intensifying social priority. Indeed, almost all of the key data trends now suggest a significantly deepening consumer issue.

For leaders – whether in business, politics or regulation – this context creates a number of important challenges moving forward.

These include basic delivery and operational challenges, of course. Banks, in particular, will need to find a way to manage a powerful shift in their consumer bases, with the UK population ageing by some five hours a day.

But they also include that linked challenge related to social utility and trust. The basic purpose of banking, if you like. And this is particularly true of today’s post-crisis environment.

The global response to 2007/8 profoundly shifted perspectives right across the social spectrum. For some, that means banking is now, frankly, seen as a form of public utility. For others, as a minimum, it is seen as more accountable to policy makers than it was.

So for firms, the political and social reality here is that issues like consumer vulnerability, are now core policy debates.

For some banking is now seen as a form of public utility. For others it is seen as more accountable to policy makers than it was.

And certainly, there’s been genuine sectorial interest in terms of delivering reform here. Many domestic firms have established mission statements to support consumers in vulnerable circumstances. The BBA has moved to address challenges related to power of attorney.

And we’ve also seen significant steps forward in related areas like transparency. The most recent Fairbanking Foundation report, for instance, highlighted important progress in terms of online support for customers in managing their finances.

So, in several key respects, the UK’s financial sector is well placed and certainly well-intentioned. The fact we’re even holding this debate is an important indication of industry intent. 

As today’s FCA paper makes clear, however, there remains important room for improvement.

Consumers in vulnerable circumstances generally do not have positive stories to tell about their treatment. Nor do the systems they encounter appear able to easily cope with difference. A core regulatory requirement.

So, while the spirit seems willing to make change, the flesh looks weaker here, which leads to the question I specifically want to look at this morning.

How do we bridge that gap between policy intention on the one hand, frontline delivery on the other? What are the key business challenges here? And how can the FCA itself better support industry?

And for me, there are a couple of clear priorities in terms of moving things forward.

First, securing board, as well as ex-co level buy-in for change. And making sure senior leader directions are then fully reflected in customer experience.

Second, a linked but important issue related to flexibility of service. So, how do you move away from services and products that seem to struggle to support differences in consumer circumstances?   

Bridging policy and practice

On the former - bridging that policy and practice gap - the first challenge is simply one of senior leader prioritisation.

Certainly, some of the FCA’s conversations with banking staff for the occasional paper, seem to suggest consumer vulnerability is not yet a business priority in all firms.

And frankly, even where it is, there’s a challenge here to turn corporate policy into consumer practice, which is not easy for large organisations.

So, if you’re a bank that operates across multiple territories, is captured by multiple regulators, and distributes multiple products, governance is clearly very complex.

At the most basic level, there will be questions here over structure – do you have subsidiary boards to manage conduct risk? And, if you do, who ultimately sets strategy and takes responsibility for consumer welfare?

Next, of course, there’ll be challenges further down the structure, for middle management in particular, over the specifics of service delivery.

Many firms will, for example, have highly specialised teams to deal with issues related to consumer vulnerability. Yet if frontline staff do not have the expertise, or confidence, to handle those cases effectively, the consumer experience is still likely to be a frustrating one. The first conversation is important here.

And the qualitative research we’re looking at suggests there is indeed a gap. So, while most large firms have head office policies in place to cover issues like power of attorney, third party mandates, family bereavement and so on, the professionals in contact with customers are not necessarily aware of them.

This, of course, raises some profoundly important questions for industry moving forward. Resource and training questions, for sure.

Many firms will have highly specialised teams to deal with issues related to consumer vulnerability. Yet if frontline staff do not have the expertise, or confidence, to handle those cases effectively, the consumer experience is still likely to be a frustrating one. The first conversation is important here.

But also complex debates around fraud risk, versus corporate sensitivity to consumer circumstance. How do you prevent the former, without managing the latter poorly? It is, frankly, often a very difficult equation to de-risk without creating a degree of inflexibility.

Now, power of attorney is the obvious example here. So while the likes of the BBA, the Building Societies Association and the Law Society are working to move things forward positively, the data suggests it’s still a source of significant frustration for customers.

Some 80% of carers say banks need a better understanding of power of attorney. While organisations like Which? have also highlighted specific difficulties, such as staff asking donors to attend interviews in branch, as well as denying online access to accounts.

Now, ultimately firms need to find their own internal solutions here. Indeed it is a core legal requirement. Remedial action is not optional.

But it is an imperative, given the social trends that are now being forecast, that those solutions are found quickly.

Already, one in eight of the population are acting as carers. The number of dementia patients is due to double over the next 40 years. And, by 2050, almost a third of the population in developed economies will be aged 60 or over – so falling into the most vulnerable consumer category.

Service flexibility

And this brings me on to the second, linked priority here, around service and product flexibility.

So, how does the sector effectively deliver for people who don’t neatly fit into broad customer profiles? And how can the corporate infrastructure avoid aggravating already difficult personal situations?

Consumers in vulnerable circumstances, for example, should not need to repeat their story multiple times to multiple people. Nor do they want their financial situations deepened by inflexibility. Hence the obvious frustration in many of today’s case studies, particularly those related to issues like forbearance.

So, in a number of highlighted cases, it seems lenders are refusing to engage with customers who request temporary support in managing repayment schedules, until they have actually missed a payment.

Now, it’s difficult to argue that there’s no room or reason for improvement here. Indeed many of these challenges seem to possess strikingly common sense solutions.

But in other areas, particularly technology-related, we know there is actually considerable complexity facing leaders – underpinned by the difficulty of forecasting how vulnerability will be affected by, as yet, unknown innovations.

Certainly, there is a risk of exclusion here. Some 49% of over 55s in the EU have never made an online purchase – and there is a tranche of customers who either do not want to, or cannot, manage their finances online. Indeed fewer than half of UK adults over 65 currently access the internet.

So for many consumers today, the increased mechanisation of service delivery is clearly an alienating trend.

What is very difficult to predict, however, is how this might be affected over the long-term future, as UK society ages and technological reach increases.

Innovation has that habit, we know, of leaving some behind. But as US economist Joel Mokyr argued in the Enlightened Economy, it also has the capacity to change the world for the better, solving problems that were not even imagined.

So, while new goods and services can be expensive to design, as Mokyr says, once they work they can be copied at very low or zero cost, which means their impact on consumer welfare is potentially very large.

There is also the possibility here that digitisation will, over time, strip away product value on the supply side, and add it to the buy-side. Thereby benefitting consumers.

And, potentially at least, technology has the capacity to reduce market entry costs for new firms: driving greater differentiation across the market and ultimately supporting a greater proportion of society.

Conversely, of course, you can argue that lower product value here might just reduce the incentive for firms to offer differentiated products, and increase the pressure to manage down costs in areas like branch closures. So-called ‘extreme streamlining’. Characterised by less personalised, multi-channel customer services and remote customer touch points.

In this world, there is a real danger of an increasingly automated, overly prescriptive approach to consumers with ‘non-standard’ situations, if you like. Forms of identification, for example, as well as impaired or unusual credit histories, medical histories, specific age profiles and so on.

The occasional paper highlights the importance of leaders responding to these forward-looking questions as a matter of priority. Both potential opportunities and risks.

And when I say leaders here, I very deliberately mean policy leaders as well as business ones. Indeed, the FCA has already established a Project Innovate team at its offices to support innovative new technologies and business models to come to market, where there seems to be consumer value.

Questions for regulators and firms

And this takes me to my final point today: while I do not believe it is the FCA’s job to be the conscience of the City, it is an imperative that rules do not inadvertently create problems.

So, as an example, there is a long-standing, official expectation on industry not to make changes to the terms of a financial agreement – and that seems sensible for a majority of customers.

But how then does that affect those who might require greater flexibility of approach?  Perhaps because of a medical diagnosis or some other temporary condition.

Similarly, we know unsophisticated, mandated disclosure achieves little, if anything, by way of reducing information asymmetries. Yet for many years it was a standard response of regulators as a means of overcoming product complexity.

Now, this is changing as the FCA engages on areas like behavioural economics, with banks also positively contributing to our econometric modelling work across several key markets.

It is important, however, that global regulators are willing to interrogate the impact of their own rules in order to reduce unintended consequences. Just as it is important for firms to positively engage in the public policy debate.


I’m delighted that this is the case today. So, my thanks again go to the BBA for their support here, as well as members of the Consumer Vulnerability Network, who have driven this debate so intelligently.

As physics teaches us, the effect of positive feedbacks – the process by which small variations become increasingly large – makes it quite possible to move from one state to another both rapidly and abruptly.

Today’s publication seems to me a potentially important ‘positive feedback’ here as we look to switch states from mixed practice to best and - in turn - manage the impact of the societal trends ahead of us.

For the City and its leaders, it also, of course, happens to be key test of conscience.