Whether it’s scrapping charges for overdrafts, setting up research centres for responsible business, or hiring big advertising firms like M&C Saatchi to invite us to hold them accountable for their actions, you may have noticed, British banks are on a charm offensive. NatWest’s slick campaign “We are what we do” epitomises the distinct sense that banks are trying to win the public over again. Add to this the buoyant market for financial products, it begs the question: have we learnt the lessons of the crisis or are we about to see history repeated?
Peer beneath the advertising gloss and things seem worryingly similar in the wider finance industry. Soaring levels of consumer debt, together with a growing number of non-high street lenders doling out subprime loans for houses and cars (the same loans that only ten years ago precipitated the crisis) echo pre-crisis conditions.
A key problem remains the phenomenon of mis-selling – the deliberate or negligent sale of financial products or services. Mis-sold products are either unsuitable for the customer’s needs, misrepresented or too complex to understand. This is a core issue that retail financial services must face in order to avoid future catastrophes and rebuild confidence. Indeed, the mis-selling of financial products and services is a recurrent theme and the stand out systemic problem in the UK’s market for consumer financial products and services.
The payment protection insurance (PPI) scandal is perhaps the best known example of mis-selling in recent years, with 13m complaints being made since 2007 – 70% of which have been upheld. But while PPI dominates attention, mis-selling continues to affect products such as mortgages and pensions that most of us have a stake in.
Even if we have not been directly affected by mis-selling it still casts a long shadow. For example, the largely taxpayer-owned Royal Bank of Scotland recently agreed on a £4.2 billion settlement with US regulators in relation to the mis-selling of US$32 billion of mortgage-backed securities in the run up to the financial crisis. The buyer of those mis-sold mortgages: Fannie Mae and Freddie Mac, the US government mortgage financing agencies at the centre of the global financial crisis.
The motive to mis-sell
In my recent research into the finance industry, I found that mis-selling can become entrenched and an accepted feature of sales practice. This is despite the existence of compliance departments that are tasked with ensuring fair sales practice, training and emphasis on treating customers fairly and active line management and monitoring of sales activity. There seem to be three main reasons at play.
First, most employees in retail financial services are rewarded – at least in part – with higher rewards for higher sales. This is as true of call centre workers as it is for traders. Compliance departments are always reactive and turnover in the industry is such that employees tend to focus on their next pay packet and the sales targets needed to get their bonus. Reactive compliance is effectively a game of cat and mouse – eventually the cat will get the mouse, but not before the mouse has had its fun.
Second, I found in numerous interviews with people in the industry that most of the (now mandatory) training that’s done in relation to treating customers fairly is ignored. It’s not that this isn’t important; it’s that on the shop floor the practices and routines of customer interaction are largely about “making the sale”, even if this means “getting one over” on the customer.
Third, many firms and regulators are well aware of the problem of their staff mis-selling, but their solutions often amount to more surveillance and greater levels of workplace control. This is ineffective because creative and smart employees with an incentive to mis-sell will always find ways around static rules and regulations.
What we could do differently
There is a long history of research into perverse incentives that shows how easy it is for rewards to skew behaviour at work. The best way to avoid this is to pay employees a better basic wage and link bonuses to goals that are longer term. For example, things like customer retention or satisfaction are demonstrably of strategic significance to most businesses, albeit requiring a longer amount of time to assess.
Beyond this, we also know that customer feedback and peer-to-peer evaluation is also a pretty good way to encourage employees to act ethically. This is because customers are exposed to employees’ actions and peers see more of employees than line managers. So using this to determine bonuses could encourage better behaviour, as well as a more rounded review of performance.
Customer service is key. The closure of local bank branches and the growth of call centres has played a role in the post-crisis rise in mis-selling. After all, it’s easier to mis-sell to someone you’ve never met, or are unlikely to meet in person. Many of the people I spoke to for my research described finding it much harder to mis-sell to those they have struck up a relationship with. Similarly, they felt a real disconnect between their loyalty to the customers and the sales targets expressed and demanded by line managers.
Because of this, banks need to think carefully about what customer service actually looks and feels like and the most appropriate means to deliver it. Getting these things right would go a long way to solving the problem of mis-selling.