The consumer protection trap

How obscure the words caveat emptor now seem. For decades this Latin phrase meaning “buyer beware” was the key tenet of consumer law. But it was also a principle used to pernicious effect by unscrupulous businesses which claimed that if a customer got a bad deal it was simply because he or she had not conducted sufficient due diligence.

The growth of consumer protection in the last half century has rightly put paid to that, to the benefit of both customers and good companies. But today’s daytime television adverts and the incessant text messages from no-win, no-fee law firms underline how we have entered a new era. And it is not an era that is necessarily good for customers, or indeed competition.

This new era has come about in the wake of the financial crisis, and the various mis-selling scandals that showed—in the confession of one chief executive—that banks lost sight of their customers. The scandals didn’t only give rise—and money—to the claims management industry, but also changed the attitudes of regulators.

The now defunct Financial Services Authority said before the financial crisis that "the overriding principle is that the consumer should act reasonably,” adding that: “they must make a reasonable effort to understand what is on offer and properly evaluate the information provided.”

Now the focus is on making sure that banks anticipate the wants and needs of customers, and ensure they receive a fair outcome regardless of whether the sale was with or without advice. The FSA’s successor, the Financial Conduct Authority, stated recently that it would focus on “putting more responsibility on providers to ensure that products only reach the customers they were designed for”.

Now, if a customer wants to upgrade to a packaged bank account, they can face lengthy questioning about what other types of insurance they hold to check they do not already have travel or medical insurance. Those seeking an interest-only mortgage can expect to have to prove to the bank that they will be able to repay their home loan.

This level of consumer protection goes far further than any other sector, and there is a good justification for that: products are more complex, the amounts of money involved can be much bigger and any miss-selling can take decades to come to light. It is also absolutely right that banks should take responsibility for selling things to customers that they need.

But where does this new stance leave customer responsibility? Are customers now deemed to have no responsibility for what they buy when it comes to financial services, leaving it instead in the hands of the banks and the regulators? Have we slipped into an era of customer irresponsibility? If customers do still have responsibility for their decisions, then what is it?

Assuming that customers have no responsibility for their actions is not good for customers, either in the short term of the long term. As Keith Joseph once said, if you take responsibility away from people, they become irresponsible. Financial services are no exception.

If banks and regulators have all the responsibility for what people buy and customers have none, this can encourage consumers to disengage, and rely passively on regulation rather than informing themselves. Nor will it be good for competition. Without responsible consumers who can exercise informed choices between different products and services, there will be no healthy competitive market.

A knock-on effect is that banks will only sell vanilla financial products suitable for “average” customers. Providers will steer clear of more innovative alternatives, and the advice that is often offered at point of sale. This retreat is already underway. The Retail Distribution Review led many banks to withdraw their advised sales processes for all but the most affluent customers. Millions of customers now have nowhere they can turn to for financial advice.

What is in everyone’s interest is to have informed, empowered consumers, confident in their ability to understand and get the services they want and need—and to make sure they don’t get things they don’t need. This is why I would like to see stronger words from Government and regulators—as well as consumer groups—reminding customers not to forget the responsibilities that go hand in hand with rights. We need to agree as a country what responsibilities we still expect consumers to have.

Is it reasonable to suggest that bank customers should find a few minutes each month to check their account statements? I would say so. Should they be encouraged to do their own due diligence and take the effort to understand what they are buying? Yes.

We should avoid a culture of consumer irresponsibility. Instead, we should aim to be a nation of savvy consumers who are confident in taking responsibility for their financial decisions.