A new report published today by the think tank Social Market Foundation, called A Confidence Crisis? Restoring Trust in Financial Services, found that voracious competition over headline prices in financial services “comes at the expense of product quality, undermining consumer trust and compounding inertia“.
Social Market Foundation believes that instead of focusing solely on boosting the competitiveness of the financial services market, the Government should also create a ‘trusted product' kite-mark scheme to improve the quality of financial products.
The SMF analysis finds that financial services markets are highly competitive for new customers, but loyal ones get a raw deal as a result. Financial providers compete avidly for new customers, who are usually young people, through offering them cash, ‘teaser' interest rates and cheap insurance premiums.
But these are often cross-subsidised by unfair practices like hidden charges, interest rates that fall over time, and reduced insurance coverage, eroding consumer trust in providers.
New polling reveals that inert and confused consumers are ripe for the picking. Strengthening competition without tackling provider reliance on customer inertia will make these problems worse.
John Springford, the report's author said: "From the Independent Commission on Banking's interim report, to George Osborne's Mansion House speech, policymakers are pinning their hopes on greater competitiveness in financial services to make the market work for consumers.
"Competition can be a great thing for consumers. But our research has found that in the financial services market, where complexity makes it hard for people to assess value, price competition leads to hidden charges, poor coverage and acres of small print. No wonder they are confused and mistrustful. The Government needs to step in and lead the market towards healthy competition on quality rather than damaging price competition."
To safeguard quality, the SMF suggests that the Government should create a branded kite-mark for 'trusted products' that reach certain standards, encouraging firms to compete on the quality of their products. Products that did not meet the ‘trusted product' criteria would carry a health warning, and all products would be displayed on the Money Advice Service website, which would then become the comparison site for all products, ‘trusted' or not.
The SMF report dismisses financial education as a potential solution: "Financial education is a red herring in this debate," continued John Springford. "Millions of pounds have been squandered on this agenda to no clear benefit. Even if financial education did work, the onus shouldn't be on consumers to navigate the minefield of unfair practices that exist in the industry. The only solution is to make firms compete on quality rather than price."
