Let the Devil take tomorrow

Drazen Jaksic, sales and marketing director at Assurant Solutions, explores the moral maze of consumer and product provider responsibility, and the confusion that reigns over state help for home buyers

As an industry, we understand that it is our responsibility to treat customers fairly. Unfortunately, in the recent past there has been widespread criticism of certain areas of the market concerning the failure to protect consumers. Some believe this criticism is deserved, others do not.

So amid the finger pointing, how much responsibility should consumers take for the financial decisions they make?

I believe consumers neither understand the responsibility they have as part of the contractual process, nor do they accept they have any. The onus, in their eyes, is firmly on the providers of the products they have purchased.

At the end of 2008, the Financial Services Authority published a discussion paper on consumer responsibility to explore what steps it and the industry could take to help consumers understand and protect their best interests more effectively.

Preceding the publication of its discussion paper the regulator conducted some work with practitioner and consumer panels to debate what the consequences should be for consumers who fail to take responsible action when buying financial services products.

According to the consumer panel the answer was none. It did not feel it appropriate to share responsibility as regulations apply to advisers or firms, not consumers. But an adviser is not making decisions for a consumer, rather they are providing information and advice to facilitate the consumer’s decision.

Extensive regulation has been in place for some time but is it doing the job? Firms should be adhering to it in their product development processes, promotional activities and advisory services.

Advisers, under their own authorisation, have a duty to establish suitability and eligibility, and to ensure that the advice given is relevant to the customer’s circumstances and the consumer has enough details to allow them to make an informed decision.

The level of fines issued in 2008 shows that failure to comply with FSA regulations can be costly. But the fact that firms and advisers have a regulatory responsibility should not determine the proportion of responsibility between the parties involved.

Consumers buy on the basis of the advice they receive or the articulation of products in promotional material. This presupposes they are sufficiently astute to make an informed decision. Good advice does not take away the responsibility for decisions from consumers.

From a firm’s perspective, an ideal world would be an environment in which all consumers are informed, feel empowered to take a role in their financial decisions and take responsibility for these.

Informed purchases should result in higher net sales as there would be fewer cancellations and complaints. The industry and the government are taking steps to address this issue – the government is proposing to include financial awareness as a part of the school curriculum and the FSA is promoting its Money Made Clear website and continually improving the information held on it.

The national media could also play a role in helping to educate and inform consumers. Take mortgage payment protection, for example. There is no doubt that consumers need to be able to protect their ability to meet their monthly outgoings, particularly in the current climate.

But rather than making them more aware of the cover options available, the cost and their ability to shop around for appropriate products, negative headlines appear to be turning consumers off the very policies that could provide a valuable safety net.

We need to do more to engage with the national press to see an end to sweeping statements and instead facilitate more in-formed commentary. While the press is not regulated by the FSA, it arguably provides as much advice as brokers.

Combine this with the general apathy in the UK towards personal finance and the result is a resounding “I’ll sort it out tomorrow” attitude. We live in a society where the perceived importance of financial services products is low. Indeed, our research suggests that only a quarter of all consumers are interested in financial matters and consider themselves financially astute.

In the case of MPPI, while the government’s proposed Homeowner Mortgage Support Scheme has the good intention of helping home owners remain in their homes if they suffer a temporary fall in income, for many it will just be another excuse not to take out cover in case they find themselves unable to pay.

There are a number of issues with the proposed scheme that could leave consumers vulnerable. The list of criteria that borrowers need to fulfil to be eligible for the scheme – including testing the sustainability of their financial position and their ability to resume full payments once their income increases – could exclude significant quantities of people.

Borrowers also need to be assessed by an independent debt adviser as to whether they meet the criteria, making it hard for people to judge for themselves whether they are vulnerable.

Furthermore, the government only proposes to guarantee lenders against a proportion of any loss incurred on deferred interest payments. Lenders are expected to bear a proportion of the cost – possibly 50%.

The Council of Mortgage Lenders has argued that the government should guarantee the total interest of borrowers for up to 10 years. It says the amount of capital a lender has to hold for each mortgage in arrears is between 30 and 80 times that of a new mortgage. While the debate continues and the level of take-up by lenders remains undetermined, many consumers are left unprotected.

Income support for mortgage interest is available to some consumers and the government has taken steps to improve it. The ISMI scheme will now pay the interest but not the capital on mortgages up to £200,000 after a period of 13 weeks, compared with £100,000 after nine months previously.

Despite these improvements consumers have to satisfy a long list of criteria. For example, joint mortgage holders will not be eligible where only one has lost their job or where the mortgage holders have more than £16,000 in savings. Consumers are confused as to what help they are entitled to. The only real peace of mind can come from taking out a MPPI policy. As I have said, in an ideal world we would see informed customers with a willingness to take action and responsibility. But there are some more tactical things that consumers could do to help reach this nirvana that would also protect their interests.

One of the key things is for consumers to be aware that they are entering a contract when they buy a financial services product. As with any contract, the responsibility lies with them to ensure they understand the terms. If in doubt, they should ask questions of the provider or seek independent advice.

It is also important that consumers appreciate their duty to disclose all material facts. Unfortunately, the definition of ‘material’ is not always clear.

One of the most common issues with financial services products is that they are geared to the circumstances in place at the time of sale. As part of the terms it is a policyholder’s responsibility to notify their insurer of any material changes during the life of the insurance policy.

Of course, it would be unreasonable to expect a consumer to predict any changes when taking out a policy. Therefore, consumers must be held responsible if they do not inform firms of material changes to their circumstances.

In my opinion, provided the consumer has played their part and the firm has fulfilled its obligations under FSA regulations there should be no recourse if a consumer is not satisfied with their product at a later stage.

That’s all very well in advised sales but the waters may become muddied as more products are bought via the internet on a non-advised basis. The internet is set to become an increasingly popular way of buying personal finance products – around 60% of consumers already use the web to search for products and quotes.

In this case, responsibility for product selection lies firmly with the consumer but that said, the information provided on both direct sales and comparison websites must be sufficient to allow informed decisions.

While it is unrealistic to expect a website to ensure understanding on the part of a customer, there should be suitable check points to ensure consumers have read the terms and conditions. Should it be mandatory for all such websites to have consumers accept terms and conditions before a purchase is finalised?

On the other side of the fence, we must consider what firms should be doing to support consumer responsibility. Adhering to the FSA’s principles-based regulations and its Treating Customers Fairly initiative is fundamental.

But beyond this, the industry must rebuild its reputation. The mis-selling of PPI policies and plentiful examples of companies failing to adhere to regulations have led consumers to mistrust the industry. We must address the issues LSraised by the Competition Commission and the FSA in this regard as swiftly as possible. Trust is essential when entering a contract and only if we change our ways can we change perceptions.

What would ultimately help most in redressing the balance and ensuring that levels of responsibility are unambiguous would be to define consumers’ responsibility as part of the signed contract. As has been highlighted by the FSA’s consumer panel debate, consumers do not believe that they have the same level of responsibility as firms, if they think they have any at all.

I welcome the FSA’s consultation and think there could be many positive outcomes from it – greater engagement, better decision making by more capable consumers, a reduction in complaints and more understanding of what happens when things go wrong.

But whatever changes are put in place, they will need to result in a change in society’s attitude to financial products. Therefore, it is likely to be a slow but ultimately worthwhile process.