Why consumers get value from regulation – even though they don’t know it.
The person who is never at the table but can’t be overlooked – in terms of the regulatory conversation providers
Just as the consumer is not at the table when we are making regulatory decisions– the FMA as the regulator is not at the table when the consumer is making an investment decision either.
So even though unseen, the regulator needs to:
When laws are written and expectations are set. For us, this is about the entire idea, and subsequently the practice, of conduct regulation coming from the perspective of the consumer’s experience
What product or service did they get, how did it perform, and did that meet their expectations?
And, if it wasn’t, only then do we get interested in the process of their provider. We evaluate:
Was it just a screw up?
Was it symptomatic of a broader practical issue with the providers systems or processes?
Was it something else – a conduct problem for instance?
We can do this by:
-Influencing the provider by giving clear expectations about their conduct. This stems from product design, disclosure, marketing, advertising, advice, sales, complaint handling, reporting – the entire life-cycle of consumer engagement.
This is our hard power: including guidance, compelled data disclosure and, where necessary, enforcement action.
This consists of three building blocks:
i. Taking the time to be clear what their goals are for investing, which establishes a time horizon, a return target and a good idea of what their need is for taking risk
ii. Getting investors to really understand the vital relationship between return, risk and cost, and that the key discipline – the discipline that underpins how they shop around and compare and contrast product – is to get the returns they need for the least risk and cost.
iii. Getting investors into the habit of regularly reviewing the performance of their investments to see if they’re on track; or whether they could choose something else which provides – for example – the same return for less risk and cost; or a better return for the same risk and cost.
Influencing the consumer can be regarded as using our softer power. But really, if a properly informed consumer assesses that an offer from a provider isn’t for them; that there’s something about the sales practices they don’t like; or that the cost of the investment outweighs the return; and walks away, that’s as ‘hard’ an outcome as a regulatory sanction.
It doesn’t matter how exemplary a provider’s conduct is, if the consumer across the table from them is simply not equipped to make an informed choice.
Similarly, it doesn’t matter how savvy a consumer is, if their universe of choice is a rogues’ gallery. With a mismatch of conduct and capability, the outcomes will be good by accident; wide-spread staying on the side lines; or systematic rip off.
I’ve watched with interest, and some disappointment, how some commentators have got tied up in knots about what ‘putting the customer’s interests first’ actually means. They bemoan a lack of definitions and generally using up a lot of energy wailing about different standards.
It’s pretty simple. It shouldn’t require a Dummy’s Guide, which is why we’ve resisted making our guide to our view of conduct into one.
Whatever you call it – a fiduciary duty, good conduct, putting your customer’s interests first – it all comes down to what actually happens from a customer’s perspective.
This is all about the customer’s experience of your service; and the results they get from what you sell them, or advise them to purchase, to meet their needs.
To ensure a good customer experience providers need to ask:
In short, have you done what you would expect yourself as a customer, to put them in the position of making an informed decision to go with what you recommend, or walk away?
It should be self-evident why behaving this way consistently is important.
From the big picture perspective, when this is the consistent consumer experience, confidence in all providers grows, as does confidence in participation in New Zealand’s financial markets. This includes when markets go through choppy periods and corrections.
This understanding of what to expect is crucial to the health, growth and – ultimately – the existence- -of those financial markets.
There is an inherent imbalance of information between provider and consumer which is one of the main barriers to good investment decisions.
It is not rectified, by dumping more information on consumers- in fact I’d argue that makes it worse.
Transparency is only useful when it is well articulated and combined with ease of use. That has to start with the deep psychological drivers of how investment decisions are made.
The feelings and fears – the biases and harmful mental short-cuts we make – are within the hard-wiring of customers. Many providers already know this, and cleverly design marketing materials to nudge them toward the most lucrative deals.
For example, the “hot-deals-closing-now”, where customers are required to make decisions about more than one product at a time, and quickly. This looks more like a bait and switch – or bait and transfer – than something clearly designed to facilitate a good decision about each of products in the bundle.
Providers need to use behavioural techniques to prompt a decision which is good not just for revenue targets and market share; but is also a good investment decision for the consumer.
Providers need to walk them through what they are offering by:
This is what bridges the gap between good disclosure, and good conduct – which is what we were just talking about.
The industry is fond of telling us, and the Government, that a key role for the FMA is to facilitate consumer confidence in financial markets. Everyone wins if New Zealanders are more confident participants, paying fees, getting returns, and meeting their goals.
That’s true. I’ve already said so.
But here’s the thing for KiwiSaver providers. You already have those participants. They’re already 2.6 million of them in the market.
If you have a default scheme, you get more regularly allocated to you without having to do anything.
So they’re participating (or at least they are signed up). But are they confident?
Investors in KiwiSaver are the least likely to be confident in markets, in the quality of regulation of markets, and are least likely to say that the materials they received about their KiwiSaver investment were helpful to their decision-making. Oh, and least aware of the FMA as well!
At the other end of the scale, investors in managed funds were the most positive across all categories for investor confidence.
Investors were able to choose more than one product; and many providers of course offer both MIS and KiwiSaver products. So what is it you’re doing with your MIS customers that you’re not with your KiwiSaver customers – who in at least in some cases will be the same people?
Building confidence is a shared job and I’ve already talked about what we do.
If we look specifically at KiwiSaver, some good examples are:
But providers need to ask themselves – what are we doing?
Because the answer to this challenge is, no, - I don’t think there needs to be a higher standard for KiwiSaver governance – because the required standards of governance are already high.
But I think KiwiSaver providers need to focus extra hard on doing a good job of delivering to them.
Including, for providers of default schemes, the requirements within your instrument of appointment.
Providers are in the lucky position of people flowing, unquestioning, into their business.
Of earning fees for managing their money – typically with few demands, challenges or even questions from the customer.
The quid pro quo of that privilege is that the providers need to engage with them, proactively and assertively.
It would be good to see evidence of providers thinking:
You’ve not asked for this, customers, but could we make the disclosure easier to read and more useful? What do you want to see? Does any provider ask this?
If we’ve never had any engagement with the customer – why not? How do we change that? Pick up the phone maybe? Try to get to them through their workplaces perhaps?
There are examples of good consumer-friendly disclosure and we do see examples of KiwiSaver providers trying hard to reach and to engage with their customers.
So we know it can be done.
However, we frequently see that providers are putting greater effort into acquiring customers from other schemes rather than in actually dealing with customers they have already.
What I have outlined here –the sorts of approach we‘d like to see within the industry – may not be visible to consumers.
That’s fine – we still have to do it.
Much of the work we do, and plan to do, with providers and with issuers of securities for that matter – will not be visible to consumers or investors.
Some of it may not be realistically quantifiable, in terms of impact if consumers do see it. But it is absolutely 100% central to our mandate and we will be relentless in trying to drive the instinctive and business as usual behaviours of the industry to help arrive at a place where the consumers and investors come first.
NOTE FOR READERS: These are speaking notes. The speech delivered may differ slightly from these notes.
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