Restoring customer trust and integrity in financial services

The public reputation of financial services, particularly those in banking, has been shattered over the past decade. Several established and well-known financial institutions have fallen. What has caused this fall from grace and what can be done to regain public confidence?

According to Gavin Stewart, head of Strategy Execution at the Financial Services Group of Grant Thornton UK, globalization is the major culprit as it has opened up new markets, forcing organizations to change the way they operate. This new business model has created new matrix reporting lines and increased both the volume and velocity of decision-making processes, encouraging risk-taking in new areas, which added to the complexity of already complex risks.

Moreover, massive automation has transformed financial services from an industry largely dependent on human judgment to one predominantly driven by the systematic capture and analysis of data. The dismantling of barriers between financial markets has made value chains less transparent and risk management more difficult. The ease with which consumers switch from providers of financial services has made customer retention and loyalty more demanding, affecting the bottom line as much as the reputations of financial institutions.

The public policy’s emphasis on choice and competition in a world of low yields and growing product complexity has created more incentives for consumers to buy solely on prices, as well as for firms to undermine the price risk.

Stewart cited Grant Thornton’s 2017 Customer Loyalty & Experience Index (CLIX), which revealed the scale of this challenge of regaining public trust. The findings show that some companies are making progress, but there is still a long way to go across the board. Firms will need to have a fresh approach to tackling long-term causes of the erosion of public trust if they want to achieve sustainable improvements.

The study revealed four key considerations to improve customer trust and loyalty:

Align your firm’s interests with those of your customers

Customers could no longer assume that financial services companies are on their side. Rather than rely on the firms to handle their complaints, many consumers now opt to employ claims management companies to take them through the process, even if these are more expensive. It is vital, therefore, for the firms to seek to align their interests with those of their customers as the lack of trust and confidence in firms is largely a result of the long-term divergence of interests from their customers.

Recast the concept of caveat emptor

Before the global financial crisis, regulations started from the premise that information asymmetry was the main problem. The practice is, if customers were given enough information, the concept of caveat emptor (buyer beware) could apply and firms’ responsibilities become limited.

However, the crisis revealed that misselling was much more widespread than assumed, and that, in some cases, firms acted against the interests of their customers. As it unfolded, the crisis exposed not only the degree to which the firms’ interests had diverged from that of their customers, but also their difficulty in managing the resulting risks and conflicts of interest. Consequently, this has greatly increased the onus on firms to demonstrate to their customers that their products are right and proper for them. But recently, firms and regulators began to argue that “the pendulum has swung too far” toward the customer and that the principle of caveat emptor needs to be reestablished.

However, simply increasing the information available to consumers is not the answer. Neither are approaches such as robo advice (heralded as an accurate, unbiased alternative to human advice) likely to be the whole answer, as they do not provide sufficient assurance of the underlying quality and suitability of the products.
Instead, we need a new approach, one that recasts the principle of caveat emptor for financial services in the 21st century.

Revolutionize firms’ risk management

The crisis also highlighted a series of fundamental shortcomings with current risk management approaches. Fixing these will require a major re-think of the scope and operation of risk management across all three traditional lines of defense. Any solution is likely to include:

• A methodology for describing and owning risks that is not constrained by the firm’s structure

• A culture that sees beyond increasingly siloed or isolated structures and one that properly manages the risks’ wider implications and dependencies

• Better techniques for capturing, grouping, and aggregating risks within the overall risk universe

• The ability to take proper account of high impact risks that have a low probability of occurring (often known as Black Swans), not least those stemming from the increasing reliance on technology and the (often-related) use of outsourcing

Increase customer confidence in automation

Several of the causes of the crisis are related to the increasing gap between industry and customers, most notably the exponential increase in computing power. This has reduced significantly the human interaction that customers experienced and has led to firms holding vast amounts of customer data. Both these trends remain strong, and both have reduced customers’ level of trust.

So far, the industry has largely failed to bridge the resulting gap, even when automation led to lower costs and greater consistency for the consumer. A major challenge for firms is, therefore, to persuade consumers they can be trusted with the personal data and that automated advice and decision-making will benefit them, as well as increase the firms’ profits.

Regaining public trust is never easy. Restoring the industry’s reputation will require more profound change than the majority of industry activity and regulation assumes. Firms need to demonstrate that they are serving with the customers’ interest at heart.

Boyet Murcia 3rd is a partner of Audit & Assurance of P&A Grant Thornton is one of the leadingaAudit, Tax, Advisory, and Outsourcing firms in the Philippines, with 21 Partners and over 850 staff members. We’d like to hear from you! Tweet us: @PAGrantThornton, like us on Facebook: P&A Grant Thornton, and email your comments to boyet.murcia@ph.gt.com or pagrantthornton.marketscomm@ph.gt.com. For more information, visit our Website: www.grantthornton.com.ph.

As published in The Manila Times, dated on 17 May 2017