Let’s start with an undisputable truth with respect to financial services and how the sector has prospered since the recession. Agreed truth number one is that the sector pretty much brought problems upon itself in 2008 and into 2009. Over-extended consumer credit, lax internal (and external) oversight, the drive for profit and growth over customer satisfaction, all conspired to produce a mix of toxic proportions that brought banks and other financial institutions to their knees. You know the story, it was messy, global and in some respects a breath-taking spectacle the like of which many of us may never see again.
The question I am going to address is: what lessons have been learned, if any, and what does this mean for the future?
In answering this I’m going to have regard to what the policemen of the sector can and should do. Can regulators and politicians shape a better financial services ‘future’ based on the lessons of the past? The simple answer, I think, is no, but the reasons are not so simple.
Some of the characteristics of the pre-recession (UK) market are still apparent now. Regulation and compliance issues are still at the fore but the personnel and institutions have changed. The need for scale and growth brought pressure on revenues and margins; arguably today that is not as acute, as balance sheets appear to have been restored. Treating the customer fairly was the mantra, but many a mis-selling scandal since would indicate that the customer is not always central. And then there is culture and behaviour. It used to be the case that institutions could be trusted and senior personnel regarded highly in public life. No more. Financiers have been vilified, some jailed, and the distrust that is now apparent between customer and provider has never been more profound.
But now politicians and regulators are implementing change because they have permission to do so. Where there was limited competition in some parts of financial services there is now an abundance. Parliamentary committees and political inquiries have also sought change in banking, asset management, and pensions. And at the heart of this is a revamped regulatory structure with stronger bodies (eg Financial Policy Committee of the Bank) with a brief to keep the sector under check and control.
All of this is good, but will it produce a sector that is perceived as different, behaving responsibly, with customers central to that rebuilding of trust? Possibly, but I’m not sure that it will happen just because of political or regulatory intervention.
The financial services sector is a globalised sector that has regard to local policing, whether the FCA, SEC, or EU bodies. Domestically the sector is also policed through elected politicians who can effect change – price competition in consumer credit, pro-competition in retail banking, price capping in pensions – but their real power is better illustrated when they act in concert as the US inspired FATCA legislation demonstrates. But global corporate power is the real stumbling block for both regulators and politicians.
Of the top 100 global economies in the world, more than half are corporations not countries. And while financial services companies are not the largest they service the largest. So pessimistically one could imagine a situation with financial services becoming ever larger, and less resistant to local pressure.
This may happen anyway, but those who will be successful, and understand how trust can be rebuilt, will do so with the customer and their communities in mind. As institutions shrink – fewer branches for example – but profits rise, so the power of the discerning customer will be felt. This will be demonstrated most profoundly online, but also quaintly in communities which the savvy will recognise. The sector will stay one step ahead of the policemen but should stay in step with the customer if that trust is to be regained.
If you are interested in the themes raised here please contact Ralph Jackson, Director.
Ralphj@lansons.com +44(0)20 7294 3667