Conduct vs. profit: How will it end?
Over the last few years retail banks have implemented a series of changes, often at a significant cost, to improve their conduct towards customers. On the surface these changes appear to have been successful: the industry has seen a decrease in the volume of PPI complaints and fines issued by the FCA. Some firms might think that they can begin to ignore the focus on conduct and ‘get back to the business of improving profitability’.
This would be a critical mistake.
When you scratch beneath the surface, retail banks remain vulnerable to future disruptive conduct events.
The solutions that banks have put in place through their conduct initiatives were typically in response to problems identified at a snapshot in time. While banks have been implementing these conduct changes, the industry has evolved, and new areas of conduct risk are always emerging. For example, with the growth of digital channels empowering customers to choose products themselves, there is increased risk of mis-buying. Even when the customer self-selects a product, the burden of responsibility to ensure that the customer understands its features and charges rests on the bank. As new technologies, services and relationships embraced by the industry enable increasing volumes of customer-led product selection, the need for a steely focus on conduct persists.
In addition to this, whilst the recent political and regulatory environment has been more accommodating towards the industry’s conduct, as the industry is all too aware, regulatory focus and the political landscape can change quickly. The conduct agenda, therefore, should continue to be prioritised by banks, not just to address the issues of today, but to prevent the issues of tomorrow.
So how do banks resolve this ongoing dilemma between profitability and good conduct?
Resolving this dilemma requires patience; those who act strategically can transform conduct from a threat into a competitive advantage, leading to sustainable business growth. In my opinion, long-term commercial success and fair outcomes for customers are inextricably linked.
The interests and expectations of customers are the measure of conduct. Good conduct requires banks to develop a strong understanding of the interests and expectations of customers, which should be built into the design and operation of products and services. This will become particularly important as banks invest in new technologies to launch ‘digital’ products. This is a new area for banks and regulators alike, so while capturing the digital market may seem like an arms race, banks need to take a step back and understand what conduct controls they should put in place for their digital products and services. Among other things banks will need to consider mechanisms to identify vulnerable customers, and how to assess whether customers understand key product features. This will require an investment of time and resources now to design and implement the changes, but will ultimately result in higher customer satisfaction and therefore improved customer retention and attraction.
While this argument has not always been persuasive in an industry with exceptionally low levels of switching, ‘Open Banking’ will certainly challenge the status quo. Open Banking will empower customers to benefit from transparent pricing, one of the cornerstones of fair customer outcomes, enabling them to identify who offers the best value products and services. With the veil lifted on the perception that all banks provide a similar offering, and with customers able to more readily pick and choose the best products, I believe that fair treatment will act as a key differentiator for a bank, and will be rewarded via customer loyalty.
Of course, the success of this investment in putting customers at the heart of business models will be at risk unless the bank is able to embed good conduct within the organisation.
Firstly, the KPIs and incentives of all employees should be intrinsically aligned with this strategy. Previous conduct reviews have focused on aligning the incentives of customer-facing employees – and to a certain extent senior managers – with good outcomes for customers. However there has been less rigorous focus on the rest of the organisation. Customer-facing employees might not be directly compensated for driving sales of particular products; however, if their direct managers are, such incentives could influence negative outcomes for customers.
Secondly, in order to assess whether the organisation is moving in the right direction, and create an actionable feedback loop, managers need to have access to the right information. The voice of the customer is a critical part of this. Having taken strides in actively managing and responding to complaints, banks should next perform thorough root cause analysis to draw out actionable insights. Although this qualitative analysis is more complex to manage than traditional quantitative measures, continuous improvements that increase customer satisfaction will drive increases in profitability in the long-term.
While the recent regulatory environment might appear to be more benign for banks who are tempted to seek short-term profitability through cutting corners on good conduct, this is not the time for such tactics. It is time to think and act strategically. By building conduct-focused business models and implementing measures that embed conduct into the core of their organisations, banks do not need to sacrifice long-term profits for good conduct: quite the opposite, good conduct has the power to drive increased profitability.
When the pendulum swings back, those who did not take good conduct to heart will have plenty of time to dwell upon lessons learned from the side-lines of the industry.