I’ve been reading Andy Haldane’s recent speech and kick off with this one statement among many good insights.

“A plausible objective of public policy..is not to maximise trust among consumers of financial services but to maximise trustworthiness among its producers”

That would be an interesting exam topic for anyone looking to get accredited as a regulated individual. A pass or fail based on a response to that statement would certainly focus the mind!

The speech is about the social capital of our banking system, of financial services and it’s about pensions.

Those working in financial services have lost their social identity

A recent survey of financial professionals found that more than half of us think our competitors engaged in dodgy practices, nearly a quarter of us thought that our own firms were dodgy.

Haldane suggests that those in financial services have a “social identity” that we might call dodgy. I’ve noticed this at gathering of my peers where conversations that we would never have with our families (let alone our customers) occur around the table. Typically these are conversations about profit maximisation where shortcuts to “quick wins” are spoken of as a social norm.

It appears some of us feel we were born to be dodgy.

So it was that the major consumer scandals,  the unwarranted taking of pension commissions, payday lending, PPI and the wholesale scandals surrounding collateralised debt became collectively acceptable. These problems are made worse by poorly educated and disinterested consumers (according to Government 17% of us have maths skills no better than the average primary school child).

It was in the context of this analysis that Haldane made his now infamous admission

“I confess to not being able to make the remotest sense of pensions”.

Here is a similar statement made to me yesterday by a member of an IGC

The particular challenge in terms of investment cost transparency is not that people don’t want to do it. But, firstly, I sense there’s a huge knowledge gap (amongst, for example, IGCs) in terms of understanding the nature of the components that make up investment costs.

His position could be summed up by his statement

To many of us on IGCs the investment fund itself is a bit of a black box

Perhaps to this; Andy Haldane comments

“There is plenty of evidence, including from the financial crisis, of financial products being made more complex than was necessary and consumers being charged a premium for buying them”

This is, I think, where we are with the debate on value for money. Insurance companies and asset managers telling consumer groups their products are too complex for them to explain and consumer groups being given little or no help by Regulators who seem to think a “market solution must be found”.

Market intervention is needed because social capital (trust) is so low

It is clear that understanding how our pension funds work is too hard for the Head of Economics at the Bank of England.

It is also clear that it is proving too hard for IGCs.

The Regulator published a paper showing how the black box could be unlocked but that was over a year ago.

The “market” has not taken up the challenge of that paper, probably because of a combination of

1. The noxious odours that might be leaked if the box was open
2. The cost of uncovering and then rectifying the problems that might be uncovered
3. The long term impact on the financial models of asset managers and insurers if their principal drivers of profit generation were challenged.

I don’t believe that most IGCs have the confidence to challenge their insurers, let alone the underlying asset managers because they feel complicit in the problem and fear the solution.

My correspondent was one of the few brave people who admitted his inadequacy, I fear most IGCs have not yet got to his position.

And here’s the rub. Those improvements that Haldane talked of in the consumer experience were as a result of regulatory intervention by the competition authorities, not market led initiatives by the industry. He wrote before the Queen’s Speech which saw another set of regulatory interventions (the Pensions Bill 2016).

Remedy

Haldane’s argument is that there remains a Great Divide between how financial services are seen and how they would like to be seen , by the general public. This divide means that the market cannot mend itself, trust being lost at both a personal and general level.

Haldane’s solutions are thee

a) Enhancing public education

b) Creating Purpose in Financial Services (banking)

c) Communicating Purpose in Financial Services

Reading the speech it becomes clear that rebuilding the social capital of “trust” in financial services, banking or pensions is not going to happen overnight and is not going to happen because of the short-term Regulatory fixes that happen in Queen’s Speeches or Bills or Acts.

He concludes

“Social capital is an elusive asset. But having seen it eroded, it now falls to us all to rebuild it, brick by brick, bank by bank, policy by policy, word by word”.