If you are a CEO at any financial institution how can you rebuild trust with the retail investor? A report by the US Government Accountability Office (GAO) estimated that the Global Financial Crisis in 2008 cost the US economy US$22 trillion dollars. Governments around the world had to bail out banks which had an impact on trust in the financial system. The Edelman Trust Barometer, a survey of consumer trust across industries, ranked retail investor trust in financial services at 44 per cent in 2018. Although the barometer has been rising in recent years why is it persistently still low? What does it say about an industry when over half of the general public still does not trust it? Regulators and industry bodies have been making rules and regulation more prescriptive but does this actually help build trust? Whilst investor confidence has risen, is there anything that financial services firms can do to help build investor trust?
Financial firms are complex beasts. It is difficult for an individual to trust an organisation that one does not understand. The industry tends to take simple concepts and make them more complicated which also adds to the problem. Although regulation around the world has been enhanced to protect consumers and many financial firms say they are trustworthy, few demonstrate how they are trustworthy. More than a few financial firms have trust or code of conduct in their organisational mission statement. Sales of Enron’s 64-page code of conduct has become internet folklore. Firms have a moral obligation to tell you when they have made a mistake as it affects you. Despite this, many financial firms still do not have an honest and open conversation with their stakeholders or clients. When was the last time you received a proactive annual letter from a CEO to all of its clients outlying the challenges it had during the year and what actions it has taken to safeguard and protect client assets? It is natural for a company or an individual to not highlight mistakes and only focus on the positive. A key inherent problem is that most financial firms have short term stated goals (profitability, earning targets, return on equity etc.) but most clients of financial firms have long term goals which, at times, can conflict with corporate objectives. The elephant in the room, of course, is the threat of regulatory sanctions and legal liability inhibits a firm from being more open with its clients and for employees within a firm to speak up.
Last year a UK based bank, TSB Bank, had IT problems that prevented 1.9 million customers from accessing their accounts. Whilst IT failures are inevitable, communication from TSB which gave an over-optimistic view of the failure which lead the CEO of the UK regulator, The Financial Conduct Authority (FCA), to comment that: “The FCA has been dissatisfied with TSB’s communications with its customers and we have had concerns that TSB was not being open and transparent about the issues experienced.” Not only did the CEO lose his job but the UK Financial Conduct Authority and the UK Information Commissioners Office are conducting investigations which will likely lead to hefty fines for TSB.
I was recently struck by how a small camera supply company, Peak Design in San Francisco, dealt with product failure. Camera anchors are a fancy bit of string that holds cameras. I noticed that one of my camera anchors from Peak Designs was starting to fray. To a photographer, catastrophic failure is watching your camera fall in front of you. This would also be detrimental to a company manufacturing the anchor. The company wrote to me on its initiative and stated “While the number of people affected is small, we think it’s unacceptable by the standards we’ve set for ourselves as product designers, and we are correcting it. Our reputation is built on the security of your cameras and the transparency with which we conduct business. We hang our hat on your trust — that we’ll keep your gear safe and we will always do right by you.”
The lesson learned here is that I didn’t have to do anything the company contacted me. Peak Design realised that it had a problem and rather than waiting for a bunch of angry photographers to contact them with broken cameras. The company proactively identified the problem, it admitted that it made a mistake, corrected the mistake and in turn enhanced its brand because it was authentic in its communications to customers. The company communicated to all of its customers, not just the customers who had a problem. Sending out a message to its customers proactively not only sent a strong message to its customers but to its employees to speak up. The next time I buy a camera accessory Peak Designs will be at the top of the list because I know they will be honest with me. Why can’t financial institutions act similarly?
If you have ever worked in a financial institution and been involved in an error meeting you know the drill. The error gets discovered and you tell your manager. Depending on the loss your manager calls his manager. Compliance, legal, operational risk and depending on the size of the loss media relations gets called in. There are meetings about if the regulator needs to be notified. There are many reports. The focus of the conversation is why did this happen, whose fault is it and the circle of blame starts. Everyone involved becomes aware of the bus picking up speed and becomes adept at trying to avoid it and suddenly a root canal looks more inviting. The conversation is reactive instead of proactive and focuses on career survival than identifying what the root cause is and providing good client outcomes. Financial institutions are incredibly complicated organisations and any risk management professional will tell you that you cannot completely avoid risk. Mistakes will happen and senior management needs to acknowledge this and most importantly be open about it. The only practical way large financial organisations can implement this change is from the attitude and openness of the CEO.
Whenever there is a financial crisis or a large investment loss affecting the retail public the tendency is to write more rules and more regulation. In some cases, this may be necessary, but it should not be the case all the time. Regulation is part of the problem as well. Codes of conduct and ethics statements should be principle-based with clear guidance and examples of what is right and what is wrong. Knee-jerk reactions to make rules more complicated only make the rules difficult to interpret and necessitate the requirements for more compliance and legal specialists. Regulators need to give companies some safe space to have open conversations with their clients. A safe space is no excuse for companies not to have adequate controls and should be held to account. However, any risk management professional will tell you that despite the best control structure mistakes will happen. If the rules are easier to interpret more people will follow them. Complexity does not promote adoption and in some circumstances can lead to ambiguity if a plausible alternative explanation is available as to why a rule hasn’t been followed.
Financial services are becoming more sophisticated with new technologies to further empower the client. Incumbent players’ grip on industry market share is diminishing with the advent of challenger banks making the secret sauce not so secret and a commodity. New regulations in the UK such as Open Banking, Payment Services Directive 2 and the Current Account Switching Services make it very easy for customers to switch institutions. Both incumbent and challenger financial institutions need to be aware that the landscape has changed. In the old days, a client had to fill out multiple carbon copy-laced forms over many weeks/months to move an account. In the new dawn if a customer loses trust in a company they do not vote with their feet they just tap on an app.
For trust to increase in financial services, the industry needs to have more authentic communication with their clients on the problems they face and that starts with the CEO. The conversation and dialogue between financial institutions need to be more proactive than reactive. Having a CEO that is transparent with the facts with clients would also send a message to staff to speak up when they have concerns and also reinforces and promotes a strong and ethical employee culture. It will also increase information sharing within the industry on how to make it safer which is a benefit to the wider community. How many long-lasting relationships do you know, or successful marriages, endure the test of time without open communication during the good and bad times?
Perhaps financial services can take a cue from a small camera company in San Francisco.
Corey Cook, CFA, Ch.FSCI is a Financial Planner with Octo Financial Planning. His volunteer activities include being a member of the CFA Institute Standards of Practice Council and as a charity trustee. All opinions are his own.
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