Towards a Consumer-Focused Culture in Financial Services Firms - Gráinne McEvoy, Director of Consumer Protection

Address by Gráinne McEvoy, Director of Consumer Protection, at Grant Thornton breakfast briefing, Grant Thornton HQ, Dublin.

Introduction

Good Morning Everyone!

And a big thank you to Grant Thornton for inviting me here this morning to share with you some best practice insights on building a consumer focused culture in financial services firms.

With Christmas just a few weeks away, I thought it might be worth reflecting on why Frank Capra’s 1946 movie, It’s a Wonderful Life, has become a much loved Christmas classic.

The movie tells the story of George Bailey who uses the savings he has earmarked for his honeymoon to keep his bank, Bailey Building and Loan, solvent when it is threatened with a customer run on deposits.

George wants to keep the bank afloat not only to protect his depositors, but also so that his bank can continue to fund home ownership in the town of Bedford Hills.

Otherwise, he fears, the bank might fall in to the hands of his greedy rival, Henry Potter, who prefers to earn rental income from letting property in overpriced slums.

There is far more to the movie than this, of course.

But I reckon the reason it still resonates more than 70 years later is because it celebrates a wonderful life – the life of a good banker who sees his purpose as helping his customers finance their ambitions to build homes for themselves and their families and to build a prosperous community for the benefit of all.

It is a sorry reflection of the times we live in that I cannot recall any hero bankers featuring in the movies these days.

The reputation of banks – and indeed of the wider financial services sector – has taken quite a beating in recent years in the aftermath of the global financial crisis and subsequent conduct scandals.

The result is that trust in the financial system is low.

But I believe that trust can be rebuilt.

And I hope to share with you this morning how that can be done.

The Role of the Central Bank

But first let me explain the role of the Central Bank.

We serve the public interest by safeguarding monetary and financial stability and by working to ensure that the financial system operates in the best interests of consumers and the wider economy.

We see the monetary and financial stability aspects of our work as complementary to our consumer protection work as consumers benefit when prices are stable and financial institutions are prudently managed.

But we do far more than working to keep prices from rising or falling too sharply and helping to ensure that financial firms are safe and sound.

We are also increasingly focussed on conduct regulation – or regulating how firms behave - with the aim of ensuring that the best interests of consumers and investors are protected and that markets operate in a fair, orderly and transparent manner.

Sectoral Risk Analysis

Many of you will know that strengthening consumer protection is a key strategic priority for the Central Bank over the three years to 2021.¹ 

But with more than 10,000 entities to regulate and supervise, we must focus our resources where we see a significant threat to our consumer protection objectives.

That is why every year we engage in an exercise to identify the risks faced by consumers and to prioritise the regulatory and supervisory actions we plan to take to tackle those key risks.

We call this our Sectoral Risk Analysis.

We draw on a wealth of information to inform this analysis including:

• our supervisory work and experience;
• analysis of consumer data submitted by firms;
• external and internal market research and analysis;
• developments at a European and international level;
• advice from the Consumer Advisory² and
• our engagement with stakeholders, including consumer groups, statutory consumer bodies, civic and political society.

Let me give you some examples.

One of the ways we assess the risks faced by consumers is through our themed inspections which focus on a specific topic or product. Over the last few years, we have conducted thematic inspections on the health insurance renewal process, motor damage claims processing and the sale of gadget insurance – covering the likes mobile phones and laptops.³ As part of this work we have engaged in extensive consumer research.

Since 2013, we have also been monitoring social media platforms, blogs and other online content so we can understand consumers’ experiences and concerns around financial services and products. This monitoring has identified issues such as customer service and call waiting times in regulated firms, unauthorised firms operating within the Irish market, and firms not complying with advertising requirements for financial products.

More recently, the Consumer Protection Directorate has taken part in Consumer Engagement sessions, a form of direct market research between Central Bank staff and a sample of consumers across all the financial services industry sectors.⁴ We call them Meet the Boss sessions because we consider that we are effectively working for consumers.

Our research tells us that while consumers show loyalty to their existing bank in day-to-day banking, there is significant distrust at the corporate level, particularly in relation to high interest rates, branch closures and the legacy of the tracker mortgage scandal.

Trust in insurance companies was also eroded due to poor consumer experience, frustration with renewal and claims processes and more general consumer cynicism towards the sector.

Priority Risks

Depending on the economic and financial circumstances at the time we conduct our Sectoral Risk Analysis, the priority risks can vary.

It will come as no surprise that Brexit continues to top the list for 2019/2020 and we have been working hard to push firms to protect consumers from the possible impact of a hard Brexit.  The other key priority risks we have identified are:

• ineffective disclosure to consumers when purchasing financial products - including around differential pricing;
• poor information technology and cyber risk management which threatens the effective delivery of financial services to consumers;
• irresponsible unsecured lending resulting in consumer over-indebtedness;
• poor governance and oversight of outsourcing arrangements; particularly outsourcing of customer services; and
• a lack of a consumer focused culture.

Getting the Culture Right

While all these risks are significant, the lack of a consumer focused culture is arguably the most important of all. For I believe that if firms could get their culture right, then all the other priority risks we have identified would be addressed as a matter of course.

A firm with a strong consumer focused culture would provide effective disclosures to customers; would invest sufficiently in high quality information technology and cyber risk management; would not engage in irresponsible unsecured lending; and would ensure good governance around any outsourcing arrangements, particularly when it came to customer service.

It should come as no surprise therefore that all around the world progressive conduct regulators are focusing on driving improvements in the behaviour and culture of financial services firms to help rebuild trust in the financial system following a spate of scandals.

And the Central Bank is no exception.

We recognise that culture is a matter for each individual firm in the first instance, and that no two cultures will be precisely the same.

However, we also know that organisations that have an effective culture share a commitment to high standards and values with consumers at the heart of their decision-making. This means consumers can be confident that firms are acting in their best interests throughout their entire relationship with the firm.

I have been asked today to give you some best practice insights. 

So let me give you a few examples of how to build a consumer focused culture – by articulating the values and behaviours you expect, setting the tone from the top and managing your people effectively.

Values & Behaviours

• Firms have a set of values and expected behaviours in place that clearly articulate the intended culture of the firm.
• Values are designed so that employees feel accountable for their actions towards consumers. 
• Expected behaviours are clearly articulated, easy to remember and act on, and written from an employee’s point of view. 
• Firms are open to constructive internal feedback and have in place formal and informal channels to encourage and support employees to ‘speak up’.

Senior Accountability & Tone from the Top

• Each firm’s leadership team is highly visible in championing the firm’s desired values and conduct.
• Accountability for consumer protection at board/ committee level and at an individual level at all levels in the firm is formalised.
• Firms sanction employees for behaviour that is not aligned to consumer protection, for example for mis-selling.

Performance Management, Reward & Incentives

We want to see the expected behaviours reinforced at every stage of the employee lifecycle – recruitment, induction, training and development and promotion. So, for example:

• Promotion and remuneration policies and practices are designed to encourage employees to behave in a consumer-focused way. 
• Employees are not assessed on short-term performance and financial metrics only.
• Disciplinary processes promote behaviour that is consistent with the firm’s values and expected behaviours.

Consumer Protection Risk Assessments

The Central Bank can test how well firms are doing in building a consumer focused culture – notably by using our Consumer Protection Risk Assessment Model⁵ – or CPRA for short.

When we carry out targeted CPRAs, we are specifically assessing how firms are identifying and managing the risks they pose to consumers.

The assessments we conducted over the past number of years – across a number of industry sectors - paint a mixed picture of the culture in financial services firms.

On the plus side, we found that accountability for consumer protection was evident in some role profiles and that firms had designed a number of frameworks and committees to help them meet their responsibilities with regard to managing consumer risk. 

We also found that variable remuneration was not guaranteed and that firms’ incentive schemes took in to account qualitative measures aligned to consumer protection.

These qualitiative measures include things like focusing not purely on sales targets, but also on how those targets are achieved; surveying client satisfaction and complaints, reviewing sales advisory telephone calls with customers and adhering to internal compliance procedures.

On the minus side, we found there was room for improvement in relation to performance management processes, particularly measurement and assessment of performance as it relates to consumer protection.

We also found that while firms have several formal and informal channels for employees to speak up about their concerns, in practice there were no actual examples of consumer issues being escalated through the formal whistleblowing process in these firms.

Which begs the question - “why not?’’

Culture in the Insurance Sector

In the aftermath of the tracker mortgage scandal, which saw almost €700 million in redress and compensation paid to mortgage customers, there has been intense focus on building a consumer focused culture at our banks.

But we are also focused on the wider financial services sector including the insurance sector.

Insurance serves a critical role in the functioning of a modern society, through reducing uncertainty by protecting people and businesses against the risks of future events.

Policyholders rely on insurance to provide support in the event of loss or serious accident, to plan for retirement, to enable them to confidently invest in and run their businesses and much more besides. 

A functioning financial services system, that sustainably serves the needs of the economy and its consumers, therefore requires fully functioning and trustworthy insurance markets and firms. 

However, increasingly questions are being asked about the extent to which insurance firms are demonstrating a consumer-focused culture.

You will have noted there is increasing public questioning of the pricing of insurance policies, particularly the practice of differential pricing where firms charge customers with similar insurance risk profiles different prices for the same or similar insurance policies.

In order to help consumers navigate the insurance maze, the Central Bank has introduced new disclosure regulations. These require insurers to provide individual policyholders with details of the premium paid for private motor insurance in the previous year. This information must feature prominently on the same page as the renewal premium.⁶ 

In addition, insurers must also extend the renewal notification period from 15 to 20 working days for motor, health, damage to property and general liability insurance to allow policyholders more time to seek comparison quotes.

In relation to Brexit, the Central Bank has also been driving insurers to take the necessary action to ensure they protect consumers because we were concerned that if insurance companies failed to put the necessary plans in place they might not be able to service the policies of Irish customers post-Brexit.

In that regard, we also worked with the Department of Finance on legislation to provide insurance contract continuity in the event of a no-deal Brexit. The legislation allows certain UK/Gibraltar insurers and brokers to service existing insurance contracts with Irish policy holders for a limited time in the event of a no-deal Brexit.

In line with our expectations of a consumer focused culture, we naturally expect firms to keep their customers informed of the plans they are putting in place to ensure they are Brexit-ready.

With Christmas shopping now in full swing, it is also worth highlighting the findings of last year’s thematic inspections of firms providing gadget insurance. We found that one in five consumers did not cancel previous policies after taking out a new insurance policy on their new mobile phone or laptop.

I’m sure you would all agree that it is highly unlikely that any consumer would willingly choose to pay “on the double’’ for gadget insurance, which raises the question of whether insurers are really putting their customers first or simply selling as much product as they can without caring for good customer outcomes.

Wouldn’t you all legitimately expect a firm with a consumer focused culture to remind you to check whether you have any relevant existing insurance before selling you a new policy?

Turning now to 2020, we have also announced a review which will seek to assess the extent to which differential pricing practices lead to outcomes that are consistent with the Consumer Protection Code.⁷

Our review will focus on motor and home insurance, as the most widely held insurance products in Ireland. It will be carried out in three phases, market analysis; quantitative analysis and consumer insight; and findings and recommendations.

We will shortly write to the CEOs of the relevant insurance firms setting out our terms of reference and expectations for the review.

We will consider the potential range of policy responses, if any are required, once we have sufficient evidence to hand, in line with our domestic and European legislative mandates.

Individual Accountability

Internationally, it is recognised that individual accountability is key to successful culture reform.⁸

We wholeheartedly agree.

And that is why we have been advocating for an individual accountability framework both in our submission to the Law Reform Commission in 2017 and again in our report in to the Behaviour and Culture of the Irish retail banks in 2018.⁹ 

First, we proposed five clear and enforceable conduct standards to apply to all staff in all regulated firms. These set out the behaviour we expect of regulated financial services providers and the people working in them - standards like behaving with honesty and integrity, acting with due skill, care and diligence in the conduct of their business and co-operating with the relevant regulatory authorities.

Second, we proposed a Senior Executive Accountability Regime (SEAR) to ensure clearer responsibility and accountability by placing obligations on firms and senior individuals within them to set out clearly where responsibility and decision-making lie for their business.

Third, we proposed further enhancements to the current Fitness & Probity (F&P) regime, to strengthen the onus on firms to proactively assess individuals taking up certain senior positions.

Finally, we proposed a unified enforcement process, which would apply to all breaches by firms or individuals of financial services legislation. We also recommended that the hurdle of participation be removed such that the Central Bank could pursue individuals directly, rather than only where they are proven to have participated in a firm’s wrongdoing. 

At present, we can only impose sanctions on individuals where they have participated in a firm’s breach.  In our view, this is unduly restrictive and it is not compatible with delivering the necessary reforms and enhanced accountability.

The Central Bank is actively engaged with the Department of Finance as to the scope and development of the provisions.

In the meantime, I would like to think that the people running our financial services firms would not wait for these proposals to become law in order to take the necessary steps to build a truly consumer focused culture.

Or put another way, the time is always right to do the right thing.

Conclusion

I was very pleased to hear that many of the people in the room today are Heads of Customer Care - or similar -  because I believe that you have a very important role to play in advocating for consumers at the financial services organisations that you represent.

Despite some of the challenging conduct issues the Central Bank encounters in the course of our work, I like to think there are far more George Baileys than Henry Potters and that the vast majority of people working in the financial services sector share the Central Bank’s vision for a trustworthy financial system supporting the wider economy where firms and individuals adhere to a culture of fairness and high standards.

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Acknowledgments: I would like to thank Kathleen Barrington, Brendan Beere, Donnchadh Irish and Helena Mitchell for their assistance with this speech.

1. Central Bank of Ireland Strategic Plan 2019-2021 (PDF 1.3MB)

2. The Consumer Advisory Group advises the Central Bank on the performance of its functions. See https://www.centralbank.ie/regulation/consumer-protection/advisory-groups.

3. https://www.centralbank.ie/regulation/consumer-protection/compliance-monitoring/themed-inspections

4. See CPRA Guide (PDF 1.07MB)

5.  Qualitative Research was conducted in July and September 2019 

6.  https://www.centralbank.ie/news/article/press-release-new-insurance-transparency-rules-1-november-2019

7. See https://www.centralbank.ie/news/article/speech-introductory-statement-derville-rowland-12-november-2019

8.  See the Financial Stability Board’s publication Strengthening Governance Frameworks to Mitigate Misconduct Risk

9.   See Central Bank Response to Law Reform Commission, December 2017 and  Behaviour and Culture of the Irish Retail Banks (PDF 756.85KB)