Posted: 12th February 2016
During my meetings with business leaders across financial services, the two biggest points of discussion are the impacts of ‘digital’ and ‘regulation’. It is clear these two topics provide both opportunities and threats for firms, and every board room is giving them a great deal of focus.
In terms of a firm’s operating model, many are embracing, even championing, ‘The Digital Age’ in financial services. I don’t think it is an exaggeration to say that there is a digital revolution happening in front of our eyes.
However, I think there is another revolution coming in financial services; a revolution driven by regulation – and that is the ‘Product Transparency Revolution’.
Product transparency – in terms of price, value and performance – is nothing new across lending, GI or investments (for example, RDR). But from small beginnings, and at an evolutionary pace, are we about to see a change to rival digital as a revolution, with product transparency having a material impact on a firm’s operating model?
COULD WE BE EMBARKING ON ‘THE TRANSPARENCY AGE’?
Everyone working in financial services will be very familiar with the concept of treating customers fairly, and much of the FCA’s work has this mantra at its heart. To this end, the Plevin case had customer fairness, driven by product and commission transparency, at its core. In this case the argument was that had there been perfect symmetry and the customer fully understood the cost, value and performance of the product (in this case a PPI product), then the firm-customer relationship would have been more transparent and the customer would have been in a position to make an informed decision.
In addition to the courts and the FCA using transparency as a regulatory tool, customer fairness and trust is rightly receiving increasing attention in respect to a firm’s culture and operating model. In this way, many firms are seeing transparency as a competitive advantage by demonstrating trustworthiness and fairness. And ultimately all stakeholders – FCA, firms, customers, the media – would prefer transparency to be driven by ‘tone from the top’ and culture.
As we embark on the ‘Product Transparency Revolution’, there will undoubtedly be short-term pain for some firms as they remediate for the FCA’s judgement on the Plevin case. It will also be interesting to see what carryover the Plevin and Brookman cases have to other financial services products and how far the concept of product transparency and fairness are taken by the FCA or the judicial system. I know many firms are holding their collective breath on this front.
However, it’s the long-term impact of the ‘Product Transparency Revolution’ that has got me thinking. If there is a future in which all financial services products are completely transparent in terms of price, value and performance, how will the operating models of the future need to change for firms to win in a competitive market place?
- Will the market become polarised between price and value/performance? How will a firm differentiate itself at these extremes in a transparent world to win new customers and grow market share?
- How will a firm retain customers and protect market share with product transparency? Which battleground will a firm choose – price or value?
- Where does customer loyalty fit into product transparency? What does the firm stand for and how can its ‘purpose’ help win/retain customers on trust and reputation, and create a community of loyal customers?
- If a firm chooses to play on price, how far will the low cost distribution model go?
- Will a combination of digital and product transparency revolutions mean we have more or less new entrants in financial services?
- Will the improved use of data mean firms can stratify customer populations to create transparent products specifically aimed at smaller cohorts? On this basis will there be more products in the market? Is more choice what consumers want or need?
- How can a firm disclose more information without confusing a consumer? Are consumers ready for all this detail and transparency?
- Who is responsible for educating the consumer on what to look for and how to make decisions?
- How will product transparency impact the role of intermediaries?
- Will the FCA’s challenge of tomorrow be ‘bad product transparency’ rather than ‘no product transparency’?
We are clearly in ‘The Digital Age’ and I would argue that ‘The Transparency Age’ is following close behind. Product transparency drives to the heart of a firm’s reputation – a reputation it will want to hold equally well with the regulator, its own people and its customers. Maybe transparency is still an evolution rather than revolution but it is sure to gather pace, and its impact on a firm’s operating model will be huge. A topic for the next strategy day, perhaps?
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