Regulating Consumer Protection

Consumer protection
The words Consumer protection shot with artistic selective focus.

FinCoNet is an international organisation of supervisory authorities which has responsibility for financial consumer protection. It’s Chair, Bernard Sheridan, delivered a speech on Friday on protecting consumers of financial services, the role played by supervisors and the challenges in delivering this mandate.

Sheridan addressed head-on the issue of profits and the best interests of consumers; “how can any regulated firm argue that in trying to maximise profits for their shareholders that they would do so without seeing that the best way to achieve a long-term sustainable business model is by acting in their customers’ best interests”.

He pointed outs that doesn’t mean that firms can’t charge a reasonable price for their services, target a particular cohort of customers or deliver shareholder returns.

Sheridan, who works for the Central Bank of Ireland, explained that the Irish regulatory consumer protection objectives encapsulate a range of features including:

  • Consumer focused
  • Embedding a culture which drives the right behaviours
  • Listening to customers – being open to feedback and acting upon it
  • Transparent and reliable service which meets the needs of customers
  • Fixing things when they go wrong in a way that values the customer relationship
  • Being transparent and clear in a way that consumers can understand
  • Firms proactively assessing the risks they pose to their customers in the context of their business models and strategies and dealing with those risks in a comprehensive way.

Sheridan believes that supervisory authorities are a key driver and influencer of the behaviour of regulated firms.

There should be oversight bodies (dedicated or not) explicitly responsible for financial consumer protection, with the necessary authority to fulfil their mandates”.

“They require clear and objectively defined responsibilities and appropriate governance; operational independence; accountability for their activities; adequate powers; resources and capabilities; defined and transparent enforcement framework and clear and consistent regulatory processes”.

He accepts that defining and measuring outcomes is difficult to achieve and that unlike many prudential standards, consumer outcomes can often be less obvious and are dependent on the impact of the firm on their customers.

He believes FinCoNet has made progress on consumer protection with the publication of its initial report in July 2014 on Responsible Lending and its follow-on report on Sales Incentives and Responsible Lending published in January 2016.

Developing the capacity to help members engage with each other, share best practices and learn from each other remains a priority: “Supervisory authorities are about taking action to prevent consumer detriment, to resolve and deal with current consumer issues and to anticipate and mitigate potential future risks to consumer protection”.

The regulatory quest for customer protection and good customer outcomes continues. Boards and Senior Executives must evidence that they are taking steps to mould their culture to do right by their customers.

Econometrics or a propensity for tick-box compliance will not serve the Board well. Action speaks louder than reports. Is the Board visiting call centres, branches, third party service providers? Is the board using mystery shopping? Is the Board assessing underlying behaviours when looking at complaints? Be under no illusion, the regulator is!

Critically Boards need to get a handle on what happens in their firm on a day-to-day basis. Key questions for management should include: How do we assess the behaviours of the front-line? Have we checked for in-built bias in the sales process? Or if information asymmetry is resulting in customer detriment? Are our products we meeting real needs? Can we show how new and existing customers are treated fairly? Why would we pass the friends and family test?

Be in no doubt, the world of behavioural regulation is less forgiving as it has the added benefit of hindsight i.e. if the outcome was one of customer detriment, arguably the firm and its directors should have known better.

And with the Senior Management (Certification) Regime now in situ in the UK, the time to act is now. Wilful blindness is not a defence.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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