Financial service providers taking consumers for granted

Kiwi consumers are not voting with their wallets when it comes to buying financial products such as credit cards, home loans, insurances and when investing in savings products such as KiwiSaver funds. In the process, not only are they missing out on big dollars, but also on ensuring that their banks and insurance providers act in their best interest.

Last year a joint review of New Zealand banks by the Financial Markets Authority (FMA) and the Reserve Bank of New Zealand (RBNZ) found that there were significant gaps in the governance and management of conduct and culture issues within NZ banks. After last week’s release of the insurance industry review, it has become clear that these issues are not limited to banks, but is pervasive across the insurance industry as well.

Binu Paul, co-founder of price comparison site PocketWise, says: “Clearly much needs to be done by way of cleaning up the sector. But, consumers are inadvertently complicit in feeding these issues. The complacency that consumers show towards their bank or insurance company translates to complacency among those product providers. It means that those providers are not particularly incentivized to act in your best interest.”

There is a lack of specific regulatory requirements in relation to conduct across the banking sector, particularly in respect of the delivery of banking products distributed without financial advice.

But, the report also came to the conclusion that while the current regulatory settings affect regulators’ ability to enforce change, the issues identified in the review were not the result of gaps in regulation. It went on to state that the power to make changes rests with the banks, and their desire to change should come from a genuine focus on improving customer outcomes – not the need to comply with the law.

Paul questions whether more regulatory oversight of providers or appealing to their moral sensibilities are the only panacea to the issues identified. He says, “Regulation can’t protect you against your greed, fear, laziness or lack of initiative. Equally, commercial entities are naturally profit driven and will pander to their shareholder’s outcomes in the first instance.” He argues that the consumer wields as much power, if not more, over how providers behave.

Paul says, “As a consumer you have a duty of care to yourself. At the very minimum when your bank or insurance company sells you their product take that little bit of effort to compare that product with other choices to you. That’s the only way to keep them on their toes. Commercial threats are as much of a stick as appealing to moral sensibilities are a carrot – they can both be effective for better behavior, but I would argue the stick may produce more effective consumer outcomes.”

By not putting the banks and insurance providers under competitive pressure, consumers are inadvertently not stress testing the provider’s commitment to their financial wellbeing. There is no debate that increasing oversight and shining the light on providers will improve consumer outcomes.

But, this is a timely reminder for consumers that they have as much of a role in ensuring their own best outcomes by shopping around. The alternative outcome is that some providers continue to take consumers for granted.

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