Friday, April 10, 2009

'Supermarket' Banks - Conflict of Interest

The last 25 years has seen much change in the services offered by Banks. The traditional role of Banks, as 'Deposit Takers', 'Risk Managers' and 'Prudent Lenders', has been morphed into something akin to 'Supermarkets' of Financial Services.

The ambition for greater profits and meteoric rises in business growth has led to a situation where the taxpayer/consumer is now picking up the tab for these misguided ambitions; and trust in the banking system has been severely damaged.

It would appear that the general consensus within banking was that they should offer their customers as many financial products as possible and pass the marketing of this business plan off as a convenient; 'One-Stop-Shop' .

The theory behind this plan is that you should be able to cross-sell as many products as possible to customers so that they are not tempted to buy from another service provider, thus maximising the revenue stream from an individual client. The problem with this targeting of 'Consumer Inertia' is that, the customer will always loose out.

Perhaps it is time to have an in-depth review of how banks market their non-core products to their client base. When the two main Irish banks launched their own Life & Pension Companies, it was commonplace that they would watch out for direct debits coming in from other Life & Pension providers so that they would then contact the client and offer them their own products. They got their knuckles rapped for this practice, but it still does not excuse their abuse of the information they had to hand.

Where one institution has a financial interest in another, there will always be the potential for a conflict of interest. This is heightened where information may be shared between the financial institutions or where recommended investment funds contain large shareholdings of their own stocks. It could also be argued, that the 'conversion' (cannibalization might be more appropriate) of deposit money to cost heavy investment products by some financial institutions may not be in the best interest of the consumer. Given the current need for capital in the banking sector, I am sure that there is no pressure on the branch network to 'advise' their clients to move their deposit money to investment products, as it is not in the banks best interest at the moment.

I think that it is about time that the core product offerings of banks are decoupled from their pension and investment arms and that they are operated in total isolation of each other. The banks should focus on deposit taking, risk management and lending. Targets for generating life and pension business should not be imposed on their staff/managers. In my opinion, the traditional role of the banks is not in line with the long term goals of consumers in respect of pension and investment products. They both have their parts to play in financial planning but you have to eliminate any risks of conflict.

When your business model is based on being a 'jack of all trades' you invariably become 'a master on none'.


Liam D. Ferguson said...

When auctioneers and mortgage brokers worked together, the potential for conflict of interest was there and Prime Time showed that the potential turned into reality from time to time.

Banks and sales of insurance and investment products are no different.

Pat Quirke said...

Ger,as Al Ries says "Focus, focus, focus."
@ Liam D. Ferguson That is why as auctioneers, we never did mortgages. Huge potential for perceived malpractice, and as Prime Time proved, actual malpractice as well!
Buyer beware in financial as well as other matters.

Liam D. Ferguson said...

Hi Pat. No offence intended with the auctioneer reference. The mortgage broker shown on Prime Time was equally to blame.