Earlier this week Christopher Woolard, Director of Policy, Risk and Research at the Financial Conduct Authority (FCA), the successor to the Financial Services Authority, made a speech at the Regulatory Policy Institute’s Annual Competition and Regulation Conference.
Christopher Woolard, Director of Policy, Risk and Research at the Financial Conduct Authority (FCA).
In it he commented on the regulator’s new competition mandate, enshrined in the Financial Services Act 2012, a key strand of which is to ‘[promote] effective competition in the interests of consumers in the markets for regulated financial services’.
According to Woolard, a lack of active consumer engagement is one of the biggest obstacles to achieving greater competition in UK financial services markets.
“Probably the biggest single issue is without engaged consumers, firms have all the wrong incentives. Firms that are focussed on customer service and good value products can’t win significant market share from incumbents – even those who treat their customers poorly or like cash cows. This leads to a vicious circle where lack of consumer engagement makes other competition problems worse”, said Woolard.
He added: “There are significant informational asymmetries between providers and consumers. Advice can help bridge that gap in some cases, but it needs to be trusted and good value. The reality is many firms add layers of complexity – impenetrable jargon, pages of terms and conditions, bizarre exclusions in the reams of small print, products launched and withdrawn with often bewildering frequency.”
According to Woolard, the FCA recognises the importance of effective competition between firms and is fully cognisant of the positive knock-on effects of financial services market competition for ordinary consumers.
Woolard used the asset management industry as an example.
“Take asset management for major institutional clients, such as pension funds or insurance companies. This market is worth around four trillion pounds – even small improvements in competition here could lead to enormous savings for these clients and therefore also everyone with a pension or insurance product.”
Nick Blake, Head of Retail at Vanguard Asset Management, a leading provider of index-tracking funds, including exchange-traded funds (ETFs), and a likely beneficiary of the FCA’s efforts to improve competition, responded to Woolard’s comments.
He said: “We agree with the FCA’s recent comments on competition in financial services. Competition does rely to some extent on consumer engagement and, all too often, consumers haven’t been engaged enough to effect change. But the Retail Distribution Review provides a great potential catalyst for improved engagement and, while it’s far too soon to call a conclusive result, the early signs are encouraging.
“RDR has three main desired outcomes: 1) increased professionalism among advisers; 2) greater clarity on independence and 3) the removal of commission bias.
“Advisers have made good progress on the first outcome, filling knowledge gaps, systematising their processes and building businesses that can thrive in a commission-free world. So I think there’s a tentative tick in the box for ‘professionalism’.
“Meanwhile, clients are already benefiting from greater clarity on independence and getting better deals on price. Irrespective of whether their adviser is ‘independent’ or ‘restricted’, clients just want the best chance of reaching their goals. Transparency and the removal of bias should help to align the interests of advisers and clients, which can only be good news for clients.
“Ultimately engagement and greater competition rely on clients understanding what they’re paying for, and those hit hardest are likely to be advisers and fund managers that can’t demonstrate real value for money. Smart advisers are wise to this and have realised that they need to base their value proposition on things they can control. As a result, the typical adviser promise has changed from ‘I’ll beat the market for you’ to ‘I’ll help to stop you falling into behavioural traps’. This promise is easy to explain and simple to measure, resulting in increased engagement.
“So I think we’ve seen the regulatory shift and we’re part of the way through a cultural shift to embrace plain language, transparency and low costs. Any initiatives, including the FCA’s, that accelerate this cultural shift will be good for investors.”