In a speech to TheCityUK Annual Conference the Rt Hon Nicky Morgan MP, Chair of the Treasury Select Committee, talks about the objectives of her committee and what consumers have a right to expect as the industry moves online.
It is a pleasure to follow John, who is a regular guest before the Committee. I’m sure he enjoys every visit.
I have been asked to talk about how policy can support global trends in the financial services industry, including digitisation and “customer-centricity”. When John comes before us, our job on the Committee is to scrutinise and challenge him. And it is in that critical (some might call it contrarian) spirit that I am going to challenge the premise of the topic on which I have been asked to speak.
It is not the role of policymakers to support global trends. Parliament has set objectives for the financial regulators. Competition, market integrity and consumer protection for the FCA. Safety and soundness, with a regard to competition, for the PRA. It may, in future, wish to re-examine these objectives; but they are unlikely to change substantially. Because the objectives follow from what ordinary people – our constituents – rightly expect from financial services.
They want their money to be safe. They want savings, investments and other financial products that meet their needs. And they don’t want their taxes used to prop up failing institutions.
Parliament generally – and the Committee specifically – expects the regulators to consider how global trends might support or threaten those objectives, and harness them accordingly, maximising the opportunities and minimising the risks. To return to the theme, they expect the regulators to be customer-centric.
Digitisation – risks and opportunities
As TheCityUK has rightly highlighted, first among the trends affecting how financial services are provided is digitisation. Customers are increasingly connected to the Internet, by their phones and computers. Data can be processed and shared ever more quickly. It is easy to think this is unequivocally marvellous. But it leads to risks and opportunities. Depending on how firms and regulators respond, it can result in more customer-centricity, or less. I would like to offer a few examples to illustrate this point.
First, the shift online has led to heightened customer expectations about service-level availability, particularly in banking. Finding oneself locked out of internet banking is fast becoming equivalent to turning on the tap and not getting any water.
As firms use the availability of online banking as a reason to close branches, the Committee and regulators will rightly become less tolerant of IT failures, for the quite simple reason that the detriment caused to consumers is greater than ever.
Second, just because firms can understand their customers better, thanks to big data, it does not necessarily follow that this will lead to better consumer outcomes. In economics, when a firm knows more about their customer, it tends to reduce consumer welfare: nobody gets a ‘bargain’ because the seller knows exactly how much each buyer is willing to pay.
So as firms get to know their customers better, we must ask:
- Will their behavioural biases be counteracted or exploited?
- Will they be advertised products that reflect their individual needs, or their individual vulnerabilities?
- As products become more tailored to an individual’s circumstances, will the choices they face become simpler, or more complex?
- Does “customer-centricity” mean a more personalised form of PPI mis-selling, or does it mean genuinely consumer-friendly product innovation?
Third, and relatedly, digitisation will only drive consumer-friendly innovation in a competitive market. Levels of competition are stronger in some parts of the financial services industry than others. It is striking that, three years after the introduction of ‘pensions freedoms’, the promised innovation in retirement products is yet to materialise. And it is too early to tell if Open Banking will solve the decades-old problem of weak competition in the banking sector.
Undoubtedly, the Fintech revolution holds out great promise. So far, the most significant effects have been in helping banks to cut middle- and back-office costs. It is perfectly sensible for banks to pursue these efficiency gains. But they will only be passed on to end-customers if there are competitive pressures.
Fourth, many of the purported benefits of digitisation – including Open Banking – arise from the sharing of customer data. But the Facebook/Cambridge Analytica scandal has caused a breakdown of trust between customers and the firms that hold their data.
The financial services industry must look closely at the lessons from the tech industry, where customers – through their data – have become “the product”. And it must uphold the highest standards of care and stewardship of personal information. The industry cannot afford to lose the trust of customers through data breaches, or the mishandling of personal data.
Finally, whatever the benefits, there will remain a group of customers who insist on using cash, branch services, cheques. Who want to deal with their insurer or their pension provider on the phone. Who have vulnerabilities that may mean they require extra help using financial services. As digitisation becomes more pervasive, this group will appear commercially less attractive to serve. But they must not be left behind.
If all this sounds rather cynical, let me sound a note of positivity about the future, in particular for the Fintech sector.
As the UK leaves the EU, the City faces an enormous challenge in retaining its edge as a leading financial centre. In that context, the efforts by the Government to help London become the global centre of Fintech are not just gilding around the edge of the Square Mile. They are a key component of the country’s industrial strategy.
The Government is right to create a framework of support for the industry through its Fintech Strategy. And it is right to be thinking in particular about how to improve the sector’s access to talent, particularly coding and software skills.
The regulators play an important part too. On a recent trip to the States, the Committee heard how US regulators and firms see the FCA’s Regulatory Sandbox as a world-class initiative. The Committee routinely scrutinises the FCA, PRA and PSR; and it is interested to hear from Fintech firms about their interactions with the regulators.
The Committee’s work
I will conclude by talking about some of the work the Committee has been doing.
Since the 2017 election, the Treasury Committee’s work has, to use TheCityUK’s chosen term, been customer-centric, responding to the concerns about conduct and culture in parts of the financial services sector that are expressed to us daily by our constituents, and that fill the Treasury Committee inbox.
And its work has also reflected the growing importance of digitisation, and other structural economic trends. The Committee’s inquiry into household finances, which will report in the coming weeks, has looked at the increasingly complex financial choices that face ordinary people.
Rising life expectancy and lower interest rates mean that young people need to save more than their parents did to have the same standard of living in retirement.
On top of that, wage growth is slow and rising self-employment means incomes are more erratic. It will be ever more important to ensure that people have access to the advice they need to plan ahead, and that financial markets are delivering the savings, investment and pension products that meet people’s needs.
The Committee’s inquiry into economic crime is split into two strands: one focussed on high-end money laundering, terrorist financing and sanctions violations; the other on economic crime at the level of consumers. The spate of fraud at TSB has graphically illustrated how botched IT projects can create a goldmine for fraudsters. At heart, there is nothing new about most cyber frauds: they an old-fashioned confidence trick that deceives people into thinking they are speaking with their bank. But – partly as a result of digitisation – they are becoming ever more sophisticated and convincing.
The Committee is also closely monitoring the proposals to reduce the size of the free-to-use ATM network in the UK. It is concerned by the mixed messages faced by consumers, and the risk of a large reduction in the number of free-to-use ATMs. Paul Volcker famously said that “the ATM has been the only useful innovation in banking for the past 20 years”. I think that’s unfair. But the importance consumers attach to access to cash cannot be overstated.
The Committee’s inquiry into digital currencies illustrates well my point that technological change creates risks and opportunities. I hope the Committee will shed light on the often heated debate about the benefits of digital assets and distributed ledger technology. I expect it will come to conclusions both on how regulators should be approaching digital currencies, ICOs and derivatives, and whether and how Government should be responding to new applications of DLT.
Finally, I would draw attention to the Committee’s inquiry into SME finance. Entrepreneurs and small business owners are frequently held up as the backbone of the economy. We need to make sure that they are treated fairly when they borrow from banks, and have access to justice when things go wrong. And we also need to make sure that capital markets are functioning effectively to provide entrepreneurs and small businesses with the finance they need to grow and thrive.
I will finish by returning again to the theme of customer-centricity. Economics teaches us that, in a well-functioning market, the consumer is sovereign. Their wants and needs determine output. Customer-centricity happens naturally. The fact that we are talking so much about it today shows that this hasn’t always happened in financial services.
In some parts of the industry, poorly functioning markets have caused a misalignment between the interests of producers and consumers. That will remain a risk so long as competition remains weak, and so long as consumers struggle to make well-informed choices about financial products. But the consumer will remain sovereign in the Committee’s thinking.
It will judge innovation in financial markets, including digitisation, not on the basis of novelty or technological ingenuity, but on the evidence about the costs and benefits for ordinary people.