26 October 2018
The problem with prescriptive regulation
The FCA has released proposals to improve interest paid in the cash savings market, and I’ve spent a long time over the past few weeks getting to grips with it. The solution being proposed is the introduction of a ‘Basic Savings Rate’ (BSR), requiring firms to set a minimum interest rate they’ll offer across their products.
But having spoken to a number of banks, building societies and industry figures, the response seems muted, to say the least. One key question that keeps coming up is why have disclosure rules been left off the table?
Setting rules around disclosure has always been a favourite of the regulator, but support for these solutions seems to be dwindling. It appears that improving consumer decisions through offering better information no longer cuts it. Instead, regulators have begun to favour direct interventions, such as capping payday loans, putting limits to overdraft fees, and now suggesting the BSR.
So is disclosure dead? Well no - it just hasn’t been implemented very well. Let’s take a look at some examples of poor disclosure regulation, and how, with the right guidance, these can be improved.
The summary box problem
The savings summary box was brought in to ensure certain product information was stated before sale. As a rule of thumb, I agree with making sure key details are disclosed - and I support regulation that makes this happen.
Unfortunately, the summary box regulation doesn’t make this happen. As an example, let’s look at fixed term savings. At the end of a fixed term product, customers’ money will be moved to a subsequent account. It’s important for the customer to know what account their money will move into: what interest they’ll get, what access rights they have, and so on.
But while the savings summary box requires certain information to be stated, such as the interest rate and withdrawal rights, there’s no onus on firms to say where customers’ money will go at maturity.
Instead, some firms have decided to state this information in the ‘Can I withdraw money?’ section of the summary box, while others say nothing at all. Out of 39 savings providers analysed by Fairer Finance in our Customer Experience Ratings, 20 have failed to put satisfactory information relating to maturity.
This is perhaps the most important information to state, as customers could find their funds locked up in an account paying 0.5 or even 0.05% interest – and it’ll cost them more than they’ve earnt in interest to withdraw it. Surely if the regulator prescribes information to be stated, it should ensure all relevant information is stated, not just some.
It’s not just savings
There’s a further issue with summary box regulation – there are no guidelines around the language used to convey information. Let’s look at credit card summary boxes this time to show what I mean.
They require firms to state key information, such as the non-sterling transaction fee. But there’s no requirement to explain what these terms mean. Although it may seem obvious to those in the industry, to the average consumer terms such as ‘non-sterling transaction fee’ are often incomprehensible.
If there’s a requirement for information to be stated, then the goal is clearly to ensure consumers are provided with the best information to make the best decision for them. This goal falls apart if consumers can’t understand the information given to them.
Minimum repayment, for example, is very important to state – as it effectively tells the customer how much the card will cost on a monthly basis. But from research conducted for our upcoming credit card product ratings, we’ve seen that this is how minimum repayment is most commonly explained:
“Where there is a balance on the account, you must pay us a minimum monthly payment equal to (i) any default charges and interest due on your statement plus 1% of the remaining statement balance, or (ii) £25, whichever is higher. If the balance is less than £25 you must pay what you owe us in full.”
This doesn’t give any clear indication of the estimated cost. If a representative interest rate can be applied to representative amount of credit, then why is there no requirement for this to extend to minimum repayment?
Some firms do provide a working example, comparing the cost of paying £50 a month to the cost of paying the minimum. This grounds these calculations in something concrete, helping the customer to understand. But out of 34 providers we’ve analysed, only 15 have done this.
There is one final flaw with this prescriptive regulation – that there’s no requirement to make summary boxes clear and prominent. The information needed to be stated could be there, but it could be buried in the back-end of a firm’s website.
The IPID, again
It’s not just banking that these flaws apply to. In the world of general insurance, new regulation has required firms to provide an IPID to explain product features. I’ve already talked about the flaws of the IPID here, but my basic argument is that there’s no onus on firms to state everything that’s covered and not covered, and the template itself doesn’t allow for the finer nuances of cover to be explained.
But following our latest Customer Experience Ratings, I’ve also seen another issue – that the number of firms offering summary documents has dropped substantially. In my opinion, summary documents are the best way to provide full product information before sale – and rather than introduce the IPID, the regulator should have made guidance around summary documents better.
Looking at car insurance, six months ago the vast majority of providers offered a summary document. Now, less than half do. This is a further issue with prescriptive regulation. By moving the goal posts, firms focus on the new requirement, ensuring they’re completely compliant with it. This leads to previous disclosure efforts to be forgotten, no longer improved on, or removed completely.
How to fix it
Prescriptive regulation is not bad, per se. I think it’s one of the best tools available to ensure firms act in their customers’ best interests, and provide consumers with the information they need to make the best decisions.
But the current thinking is that you ensure a certain template is filled, without ensuring this template covers all relevant information. There’s also no follow up to it; no analysis of how effectively the requirements are being met.
If firms are required to state certain information, then as much thought should go into how this information is conveyed, or else it just becomes a box-ticking requirement for the compliance team. It’s also important not to give up on current disclosure methods, such as summary documents.
Disclosure regulation should be reworked and improved consistently, adopting the best innovations to improve customer outcomes. There’s no need to enforce an IPID or a BSR if current disclosure isn’t working. Instead, look back on previous prescriptive regulation, see if it’s working, improve what isn’t, and issue requirements around how it should be approached. Or else, we could find ourselves switching from one new piece of regulation to another, without building up a single method that actually works.