Written by Jon Dean on Wednesday 7 March 2018
Skim through any FCA paper addressing consumer detriment, and you’ll find one word pops up many times: engagement. Low take-up of the annuities open market option; poor price competition in the asset management industry; weak demand for financial advice; all stem at least partly from a lack of consumer engagement, says the FCA. February’s discussion paper, “Effective competition in non-workplace pensions”, warrants 19 mentions of the “e word”.
Regulators traditionally tackle competition issues by imposing greater disclosure requirements on firms. Perversely this often reduces transparency to the customer, alienating them by increasing the amount of paperwork in the sales process. Where disclosure works, for example by exposing hidden charges, it can damage people’s fragile trust in the industry. Where it doesn’t, it becomes a costly exercise in compliance for compliance’s sake. Europe’s latest effort, MIFID II, which cost the industry globally an estimated $800m, may have shown industry experts the scale of hidden fund charges, but to your average consumer this might just as well be the name of the latest space station or newly-discovered moon.
Yet a lack of customer interest in financial matters is not a new problem. Paternalistic employers have tried for decades to fix this with initiatives like total rewards statements, flexible benefit schemes and corporate savings platforms. We’re all programmed, it seems, to ignore hard realities. We prefer spending today to setting aside for tomorrow.
Last year’s Nobel Prize winner Richard Thaler recognized humanity’s innate tendency to take the easy path, regardless of economic self-interest. His work led to the Government’s auto-enrolment policy, and few would argue with the success of this initiative. Does this mean we should forget about engagement and use behavioural theory to encourage more long term saving?
There’s certainly a strong argument for more use of “nudge”. Used judiciously, it works. But it cannot be the only answer. Too much defaulting reduces the incentive for firms to compete, leading ultimately to higher costs for savers. Sometimes you have to communicate to generate meaningful reaction.
Which brings me back to planet MIFID II. Customers have been left mystified by the need to reconfirm their national insurance number, and unaware of the great new insight they’ve been given. Putting myself in the consumer’s shoes, I searched a few popular platforms for information on the previously hidden fund costs. In most cases, the presence of additional charges was not obvious. Where they were highlighted, finding the information meant stepping through multiple platform and fund manager web pages. In Vanguard’s case, enhanced disclosure was hidden in a page of MIFID II documents that I found only with the benefit of industry knowledge. Of the providers I researched, only Hargreaves showed pounds and pence estimates of total costs on their main fund information pages.
Vanguard are one of the lower cost asset managers out there, and by no means villains of the piece. But it feels like many firms are following the letter of the law, not the spirit. While they continue to treat customers like rocket scientists, using arcane jargon and burying key information in the small print, customers will stay disengaged and follow that easy path to a poorer retirement.