What Financial Firms Think About You

We've been mingling with financial VIPs in order to get the inside track on what they have planned for consumers!

I had a great day on Tuesday at the 2006 Moneyfacts Conference.

However, at these gatherings of the great and good from the world of personal finance, I consider myself to be both an insider and an outsider. I'm an insider because I worked in financial services for fifteen years before quitting to become a financial writer four years ago.

On the other hand, I'm an outsider because I don't work in the traditional media, particularly newspapers. Instead, I do most of my writing for websites and the occasional magazine. Although I'm not necessarily 'the enemy within', I do feel a bit Secret Squirrel at times -- and I ask questions and put people on the spot in order to tackle the issues which I believe are important to my readers.

Anyway, enough waffling from me. Here are some of the interesting comments and questions which came out of the day, the theme of which was "From Reputation to Retention"; we were gathered together to discuss how to win customers and hang on to them.

The big message: there are problems with trust, products and customer service

The conference got underway with a presentation by Moneyfacts. In it, the audience was warned that consumers have only an hour of spare time each week to deal with financial matters, so they tend to avoid 'DIY finance' and rely on trusted sources, such as the Press and financial websites.

What's more, Press coverage of personal finance is growing, and there is more and more emphasis on Best Buys. However, Moneyfacts warned companies against introducing too many terms and conditions to their products, as consumers don't like too many surprises in the small print.

Some surveys from Moneyfacts revealed that 46% of us don't trust banks; 50% had moved savings accounts due to poor service; 18% had moved mortgage lender for similar reasons; and 45% have been put off applying for a particular credit card because of bad publicity. Then again, 89% of us consider ourselves to be long-term customers of our banks, which is at odds with the other findings!

An early piece of good news for customers is that few of us pay mortgage lenders' standard variable rates (SVRs) any more. In 1998, half of all mortgage debt (50%) attracted SVRs; now, the figure is down to a ninth (11%). All things being equal, this means that lenders have lost out on £3 billion in extra interest. However, they have more than recouped this money in other way, such as higher arrangement and exit fees, plus higher margins across the board!

Financial firms were also worried about the public's rising use of financial intermediaries and introducers (particularly mortgage brokers, which now arrange more than half of all home loans). The Internet is also a major headache for firms, as it enables consumers to find the best deals with little effort, which undermines the power of their brands. Indeed, The Motley Fool was name-checked throughout the day, which proves that these powerful players are listening to us!

In addition, financial companies were criticised for adopting a 'one size fits all' approach to their products and services, despite overwhelming evidence that this approach doesn't fit with what consumers want (which is individual attention paid to their needs).

Pricey products and crafty charges

Payment protection insurance (PPI) came in for some serious abuse from Paul Lewis, presenter of BBC Radio 4's Money Box programme. One estimate is that consumers could save £1 billion a year from shopping around for PPI. However, I reckon the true figure is close to £5 billion. What was particularly interesting was not a single person present was willing to defend PPI.

Another problem he raised was the issue of persistency: put simply, financial firms have a huge problem with customers cancelling long-term insurance and investment products after just a few years. For example, almost half of all personal pensions taken out in 2001 had been cancelled four years later, which suggests that customers weren't being sold what they really needed. In the words of the FSA, "If investors buy policies on the basis of good advice, they would not normally be expected to give them up." He puts this problem down to the generous commissions paid by certain products, which encourage advisors to sell those products which make them the most money, rather than those which best suit customers' needs.

Paul Lewis also slated banks and credit-card issuers for their ridiculous charges for missed or late payments and unauthorised borrowing. Although a fair charge would be, say, £5 a time, companies typically charge £20 to £40 per offence, which is clearly unlawful. Indeed, since the OFT suggested that £12 was a fair price to pay, credit-card issuers have all (bar one), reduced these penalties to, you guessed it, £12!

Again, it was very telling that not one single person in the room was prepared to stand up for these extortionate charges. Indeed, it was agreed that the base cost of notifying a customer about these charges is around £1, to cover printing and postage costs. Of course, no-one would tell you, the customer, that, though!

Next in line were overdraft penalties: Paul showed how a Lloyds TSB customer going 1p overdrawn could run up £345 in charges in just three days, thanks a £30 charge plus nine charges of £35 apiece for bounced transactions. It's insane, but banks refuse to discuss this issue honestly -- they simply deny any problem exists or stick to the party line of "No comment"!

The good news is that no bank will allow this issue to be tested in court or by the Financial Ombudsman Service. Every single time they are forced into a corner, they settle without admitting liability, as Neil Faulkner proved in this victorious article. So, complain to the FOS or issue a court Summons to recover previous fines, because you're absolutely sure to win!

Dealing with mis-selling

One of the highlights of the day was the speech by Tony Boorman, Principal Ombudsman at the FOS, whose job it is to sort out the mess when consumers and financial firms collide.

Although much of his team's work is dealing with mis-selling claims for mortgage endowments, this trend is down and other mis-selling complaints are on the rise, including those for single-premium and with-profits bonds, pensions, 'whole of life' insurance and 'contracting out' of additional State pensions known as S2P and SERPS.

On the banking side, complaints have doubled in two years, with the most popular gripes about bank charges, mortgage fees, current accounts, unsecured loans and savings accounts. In insurance, the biggest complaints relate to motor insurance, buildings and contents insurance, travel insurance and loan protection. That's just about every financial product under the cosh, then!

A bidding battle for mortgage business

Later in the day, the boss of Moneyfacts warned the audience that mortgage brokers were winning an ever-greater share of the mortgage market, with branch-based lending falling out of favour. He also warned that mortgage brokers were outbidding each other in online auctions to buy contact details for 'hot prospects' -- people who need a mortgage.

Surely this is bad news for borrowers, who will end up in the hands of the highest bidder, who then has to recoup his/her extra costs? No doubt this will lead to another mis-selling scandal! The head of Moneyfacts also commented that most online mortgage application processes were pants, which is why so few borrowers are using them. Hence, these expensive but clumsy websites desperately need re-designing!

And a savings war, too...

Savings accounts also came in for a bit of stick, especially those which offer table-topping rates of interest but have interest penalties and other nasties hidden away in the small print. What's the point of a savings account that punishes you for withdrawing money? That's not 'easy access' is it? It's just an excuse to manipulate an account into the all-important Best Buy tables!

Another concern for British banks is the major success that small foreign banks are having over here. For example, ING Direct (Dutch), ICICI Bank (Indian) and Icesave (Icelandic) all attracted praise for launching no-strings savings accounts paying top rates of interest.

Listening to the people that matter

Customer service also came under fire: what's the point in designing innovative and attractive products, if you let your customers down with poor service? Of all the issues under discussion on Tuesday, this was probably the biggest bugbear. 'Treating Customers Fairly' is one of the core principles laid down by the FSA, but has yet to be adopted at too many financial organisations! We don't think much of the marketing and promotion of financial products, either -- and we don't like firms preferring new customers to loyal ones.

At the end of the day, Max McKeown, author of several books on managing customers and businesses, including Why They Don't Buy, gave an excellent, straight-talking speech to the bosses present. In short, he told them to start thinking about what their customers actually want, instead of churning out what they imagine we want. Consumer behaviour is evolving rapidly, and too many financial firms are dinosaurs struggling to keep up with us!

Finally, as part of the Fool audience, you are important to us, and you're also part of the much wider Fool community which is making our voice heard across the world of banking and finance. Stick with us and we'll make sure that financial firms listen to you! Tell us what you'd like to see change in the world of finance right here.

More: Use the Fool to find top-notch credit cards, current accounts, mortgages, personal loans and savings accounts!