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The consumer conundrum

Financial services professionals have been heaped with blame for the credit crunch but the issues of consumer responsibility and education can no longer be ignored


Since the economic crisis began the finger of blame has been pointed at almost every sector of the financial services industry. The result is that the government has scrambled the Financial Services Authority to create and implement more red tape wherever possible to plug gaps in the leaking ship.

Bankers obviously bore the brunt of the blame, with lenders branded greedy and irresponsible.

Meanwhile, brokers were accused of being incompetent and inexperienced.

The FSA was lambasted for being slow to react and useless while the government received so much flak that Prime Minister Gordon Brown probably felt like shutting up shop and retreating to Scotland.

Even products were criticised, with self-cert and fast-track all but killed off by the FSA as a result. But little has been said about consumers’ part in all this. News reports were quick to depict the public solely as victims, and without doubt many were.

In the US particularly, television documentaries have shown countless individuals facing repossession after taking on mortgages they could not afford.

Where consumers took out adjustable rate mortgages with an initial low rate that increased exponentially when interest rates rose, many have been faced with no other choice than to hand their house keys back.

Similarly in the UK, a lack of mortgage products for anyone with a tarnished credit rating, a dearth of high LTV deals and rising unemployment have combined to make life difficult for a large number of consumers.

Despite the base rate staying at 0.5% for the past year – the lowest since the Bank of England was established in 1694 – there were a massive 46,000 repossessions last year. While this is not as bad many experts were predicting – 75,000 was one figure bandied around at the beginning of 2009 – that still equates to a repossession every 11 minutes.

UK consumers played no part in the downturn of the economy but they were the first to suffer as a result of the lack of liquidity in the global financial system.

“Most consumers were unwitting participants in the credit crunch – they did not cause it,” says Sue Anderson, head of member and external relations at the Council of Mortgage Lenders.

“While it is clear that poor practice on the part of some consumers did exist, such as unscrupulous applicants falsely inflating their income to obtain self-cert mortgages, these were not the reason the crisis occurred.”

Paul Walshe, head of lender services at Moore Blatch, argues that consumers, along with many financial services professionals, were more victims than perpetrators.

“If credit is freely available, with no restrictions and inadequate warnings, it is unrealistic to assume that anyone beyond the creators of the debt could be aware of the consequences of inadequate regulation to head off the disaster that ensued,” he says.

And you can see his point. Prior to the downturn politicians, investors, lenders, brokers and consumers were all lulled into thinking that we had seen the end of boom and bust and that the good times would last forever.

And if the professionals providing products are under the impression that a market has defied gravity and the only way is up what hope do consumers have of getting reasonable advice on whether a product is a good bet or not?

But is this not at least a sign that consumers need to be better educated about their finances and take greater control?

Jeff Knight, managing director of Tonic Marketing Solutions, says it’s a fine line.

“We need to ensure consumers know what help is available to them,” he says. “Finances are not always top of the agenda for individuals. Indeed, for many it’s simply about making it through to the next pay packet.

“What we need is a more holistic approach that helps consumers to spend their money more wisely and seek out the best financial products.”

Others are more blunt, with one industry source arguing that while lenders and brokers have been forced to undertake some heavy soul-searching over their culpability for the financial collapse, little has been done to address the role consumers played.

Nobody is suggesting that other areas of the industry should not shoulder some of the blame – more that the blame should be evenly spread.

“The fact that credit – particularly unsecured credit – was freely available before the crisis does not absolve borrowers from taking responsibility for assessing whether or not they can afford to repay loans,” says Walshe.

“Equally, the lending industry must assume some responsibility for the behaviour of its customers. If you sanction easy credit then consumers ill assume, rightly or wrongly, that easy credit is the normal state of affairs.”

With many consumers and professionals running up huge debts on credit cards and unsecured loans it’s hardly surprising that we have seen an explosion in the number of claims management firms over the past few years.

Love it or hate it, the claims management sector has made its presence known in the last few years. Since the credit crunch hit and consumers found themselves in more debt than they realised an increasing number of claims specialists have entered the market, promising to help customers.

With borrowers clutching at straws and searching for a ’get out of jail free’ card these firms found no shortage of business.

But while consumers may have been appreciative of the services offered by claims management firms not everyone in the industry has been so supportive.

In October last year an independent study conducted on behalf of the British Bankers’ Association found that consumers could be putting their money at risk by paying claims handlers that subsequently mismanage their complaints.

And a legal ruling just before last Christmas that closed some of the loopholes claims management companies capitalise on made life difficult for a number of them.

On March 18 the Ministry of Justice suspended Cartel Client Review’s authorisation.

Then on April 7 it was announced that Ratio Money, the claims management firm at which Coronation Street actor Mike Le Vell worked as a director until recently, had ceased trading.

The news of both companies’ demise drew plenty of comment from the broker community.

“At last, a little sanity,” said one broker on Mortgage Strategy Online. “Let’s get the hangers-on out of the equation and let reality return.”

Nobody knows what will happen to the claims management sector in light of recent legislative changes but many firms are still advertising in local newspapers and they have clearly tapped into a groundswell of discontent among consumers.

And with such firms now turning their attention to mortgage mis-selling, it seems this is a market with a future.

Understandably, many brokers and lenders argue that consumers should take more responsibility for some of the financial decisions they made in the past.

But is the rise in claims management a sign that consumers are eager to walk away from their financial commitments or is it more a natural response to a general lack of awareness about how to control their finances?

Anderson says research shows that too few consumers have a good understanding of their financial situation.

“The fact that a certain product or service is available to a consumer does not necessarily mean it is right for them,” she says.

“Nobody can possibly know as much about their spending habits, preferences, plans and priorities as they do themselves, so consumers need to ensure they think hard and honestly about whether the products they choose and the advice they receive make sense with regard to their personal circumstances.

“Given the number of consumer surveys that suggest individuals have a relatively poor knowledge of their financial product holdings the conclusion must be that too few are familiar with their financial affairs to ensure they are getting the best out of the products they have,” she adds.

So where are we going wrong? If a better financially educated society could reduce risk, why are we not doing something about it?

“Education is the obvious answer,” says Knight. “But it’s not as easy as it sounds. I have two children, one of whom saves their pocket money relentlessly while the other likes to spend, spend, spend. It’s simply that they are different people.

“We need to understand consumers better, undertake some psychological profiling and segmentation and stop treating the nation as a homogenous market.

“It’s only by better understanding consumers that we will be able to determine the extent to which the government can get involved in encouraging everyone to take more responsibility for their finances because many would simply not listen,” he adds.

Walshe believes consumer awareness is key and issuing more warnings could help.

“If consumers are aware that all goods or services should be approached with care and handled with respect they will act more responsibly towards them,” he says.

But the industry can do little to increase financial awareness without the backing of the government. Indeed, with new rules popping up left right and centre those in the financial services industry are fearful of stepping out of line.

“The government should ensure that in reforming financial services regulation it doesn’t create a ’someone else is to blame’ culture that reduces consumer responsibility, or at least creates the perception that this is the case,” says Anderson.

“Regulation should be unequivocal so that consumers are clear about their responsibilities from the outset and have an incentive to equip themselves with the knowledge to make informed decisions about their finances.”

Anderson says it’s also important that information about financial services is easily understood by consumers.

“The FSA’s Moneymadeclear website and new money guidance service are incremental steps towards achieving a higher level of consumer empowerment so that individuals can fulfil their responsibilities as consumers more effectively,” she adds.

Increasing regulation has been the bugbear of the industry ever since the government started fumbling around for solutions to the economic crisis.

But could this have a negative impact? Anderson says that if the aim of regulation is to absolve consumers of responsibility we could be at risk of creating a nanny state.

The fact that a certain product or service is available to a consumer does not necessarily mean that it is right for them

“There must be a risk that the balance of responsibility becomes tipped so far towards financial institutions that consumers’ responsibilities are effectively diminished or even negated,” says Anderson.

“We have urged the FSA to guard against this outcome in its Mortgage Market Review. The regulator has emphasised that it does not see its proposals as reducing consumer responsibility but the devil will be in the detail and caution is still needed to ensure that the balance is appropriate.”

Walshe does not see it as a concern.

“While the principle of caveat emptor should always apply it is naive to assume that without some government regulation, the majority of consumers would have sufficient information to make informed decisions when it comes to selecting and purchasing financial products,” he says.

“Consumer protection is needed for the bulk of individuals who are either financially illiterate or have little experience or understanding of financial matters.”

So the obvious answer seems to be a combined initiative involving reformed regulation of the financial services industry and increased financial education for consumers. But the latter is likely to be difficult to implement.

“You have to bear in mind that around one-fifth of adults in England have problems with basic literacy and numeracy which means that financial education, while a great idea, is unlikely to be appropriate for everyone,” says Walshe.

Anderson agrees that while financial education is a laudable aim it is bound to be difficult to deliver and measure.

“Generic advice and the FSA’s money guidance service are useful but will probably only touch a small proportion of the consumers who could benefit,” she says.

“Intelligibility of information and transparency of product features are just as important in helping consumers make informed choices, especially at the point-of-sale where individuals are accessing financial products.”

So what would help?

“We need to dig deeper and find out which social groups would be open to enhanced financial education because forcing it on everyone will not help,” says Knight.

“A better solution would be to demonstrate the value of seeking impartial advice. For example, as consumers we don’t feel the need to learn about the law as when we need help we go to a solicitor. Trivialising finance risks reducing trust in the advice sector.

“I also think more education should be given to staff at some high street banks because some of the things I hear them say are frightening,” he adds.

The regulator would no doubt agree that learning to understand your customer is the key to Treating Customers Fairly.

Managing debt is a key life skill


Rod McKee
Head of Financial Capability
ifs School of Finance

A growing number of people are failing to manage their finances effectively, a problem that has been exacerbated by the recession. Of course, individual circumstances play a part in this but the importance of focussing on spending behaviour and financial knowledge cannot be ignored.

The consequence of a consumer society in which easy credit is available is that the UK continues to amass a mountain of personal debt.

Low financial literacy contributes to this problem and that is why personal finance education needs to be given a higher profile in the national curriculum, particularly in secondary schools. The best way to do this is through qualifications in personal finance. This is backed up by numerous studies, including a recent one by the University of Manchester.

Understanding and managing debt, along with being able to distinguish between various types of financial products and their implications, is a key life skill. Financial education can make a difference in helping young people make informed decisions about their finances.

Giving young people the opportunity to understand how financial products work will be invaluable in their adult lives and will arm them with the knowledge to take control of their finances.

Our experience in schools shows that young people are happy to embrace the subject as they quickly understand its relevance and can start to apply the skills they gain to their own finances.

We are an educational charity with a record of offering standalone personal finance qualifications to 14 to 19 year old students in England, Wales and Northern Ireland since September 2001.

So far 50,000 teenagers have taken one of our Office of the Qualifications and Examinations Regulator-accredited qualifications – the Foundation and Intermediate Certificates in Personal Finance (GCSE equivalent), Certificate (AS level equivalent) and Diploma in Financial Studies (A level equivalent). And demand is up, with around 30,000 expected to register this academic year alone.

The aim of the GCSE-equivalent qualifications is to provide young people with the ability to make informed financial decisions while the AS and A level equivalent qualifications provide students with good personal finance skills but are also helpful to those who might wish to pursue a career in the financial services industry.

The universal nature of these qualifications is shown by the fact they are offered by all types of school, ranging from those in challenging circumstances to grammar schools. A small number have even made our qualifications compulsory for entire year groups.

Responsibility is divided between consumers, advisers and regulators

Robert Sinclair
Association of Mortgage Intermediaries

The trend among consumer groups is to suggest that individuals have no responsibility in the product purchasing process, but we must ensure the relationship is an equal one. Like the relationship of caddie to golfer, brokers are there to offer advice but it’s clients who make the ultimate decision.

The argument goes that if a customer asks for, takes and then pays for advice they have a reasonable expectation that the onus is on the adviser for the outcome. When it goes well advisers bask in the glory of the winning putt but when it doesn’t we need to stand behind the result, explain our choice of club and the effect of the changing wind and learn our lesson.

It is becoming accepted that advice should routinely be provided in the mortgage application process. But we must be clear about the responsibility of customers. Research by the Association of Independent Financial Advisers as part of its work on the Retail Distribution Review has shown that consumers take a considered view of the role of advisers as well as their own.

Broadly, consumers accept the transactional nature of advice unless they are paying for ongoing reviews. They accept they have a role in providing accurate information and being clear on their expectations. They also acknowledge that advice has a limited shelf life and advisers can only be held responsible for a limited time, usually less than two years.

They also accept that personal circumstances change and these affect the validity of advice. So theoretically, they understand the limitations of the advice process although, of course, this may change if they suffer a loss.

We are concerned at the idea that consumers bear no responsibility for what goes on – that can’t be right. The consumer lobby must be aware that the result could be a less innovative, lower risk market which limits choice and access to finance for those without big deposits. If the risks are weighted on the side of the caddie and there is little compensation for them brokers will simply choose not to go onto the course.

Advisers should have a reasonable expectation that clients will provide complete and accurate information. This should be timely and include an expression of the level of risk tolerated and the timeframe of expectation.

We are expected to meet the consumer education bill from the Financial Services Authority and absorb all responsibility in the process, with no increase in returns. So is this a game worth playing?

I’ve always thought that informed and engaged customers provide the greatest professional rewards. We must encourage them to know more about their finances. That’s the only way to achieve a sustainable market in which our role is valued.


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