Better protected

As governments react to public outcry over the financial crisis and strive to mend the financial system, evolving regulations will require financial institutions to take more responsibility for protecting consumers and investors with respect to financial transactions explains Linda Gallagher.

Regulatory response
In the United States, the Obama administration released its regulatory reform plan on June 17 2009. One of its key elements is the promotion of consumer and investor protection. The proposal aims to establish a level playing field and higher standards for providers of financial products and services, whether or not they are part of a bank.

The administration's proposal includes:

• establishing a Consumer Financial Protection Agency (CFPA)
• reforming consumer protection to improve transparency, fairness and appropriateness of consumer financial products and services
• strengthening the framework for investor protection.

As currently envisioned, the CFPA's broad objectives would help to ensure that:

• consumers have the information they need to make responsible financial decisions
• consumers are protected from abuse, unfairness, deception and discrimination
• consumer financial services markets operate fairly and efficiently while promoting sustainable growth and innovation
• under-served consumers and communities have access to lending, investment and financial services.

But while Congress debates passage of these proposed reforms, regulatory agencies are not standing still. A number of changes have gone into effect over the past year, including the Financial Stability Plan's Making Home Affordable program and recent amendments strengthening Truth-in-Lending, Unfair or Deceptive Acts or Practices, and other consumer protection provisions.

Agencies are also flexing their muscles with increased enforcement efforts and examination downgrades.Fair lending is being actively enforced by federal banking agencies, resulting in examinations with expanded scope and duration as well as more findings. Numerous institutions have had their Community Reinvestment Act ratings negatively affected based on compliance and fair lending examination findings, with examiners citing potentially discriminatory, unfair, or misleading consumer practices. The Securities and Exchange Commission has been actively investigating many sub-prime issuers, auction-rate securities dealers, and numerous alleged 'Ponzi' schemes. Many financial institutions that offer insurance products are currently experiencing increased scrutiny by state regulators who are focusing on suitability issues.

Similar initiatives are underway in the United Kingdom through the Financial Services Authority's Treating Customers Fairly (TCF) program. TCF is tasked with achieving six outcomes, each consistent with the objectives of the proposed US reforms:

1. Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture
2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly
3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale
4. Where consumers receive advice, the advice is suitable and takes account of their circumstances
5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect
6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint¹.

What constitutes strong consumer and investor protection?
As organizations work toward both complying with regulatory requirements and regaining the public's trust, the following key areas can help demonstrate strong consumer and investor protection.

Clear communication
Customers need sufficient information about the terms of their financial transactions, in order to make fully informed decisions. Facts should be expressed in simple, straight-forward language. Other options include making documents available in multiple languages, ensuring marketing materials do not over-promise, and providing educational tools and resources to help customers understand responsible money management.

Customer benefit
The 'right' financial product should  offer demonstrable benefits for the consumer or investor. Customers should be able to understand why and how a product might meet their needs.

Consistency of practices
Sales practices should be consistent and fair regardless of the financial product or the customer profile. Standards should encourage accurate information related to all terms of a given transaction. The essence of responsible investment or lending advice is to adopt and monitor fair principles.

Customer service
Quality customer service implies convenience and user-friendly options, with clear and timely interactions between employees and customers. Organizations should take complaints seriously, with a process for tracking, trending, and reporting complaints, researching the issues involved, and providing timely responses. For those who might exhibit additional needs such as borrowers in danger of default, appropriate actions might include renegotiating a manageable payment plan.

Accountability
When standards have been put in place to achieve consumer and investor protections, Boards, management, employees, and vendors must be held accountable for meeting these standards. Stringent enforcement and disciplinary mechanisms should be in place to discourage non-compliance.

Conclusion
The economic crisis has precipitated the need for financial services organizations to rebuild trust and confidence among their stakeholders; however, in the meantime many regulatory agencies are not sitting still. The results are evident with increased enforcement actions and litigations, and numerous proposals for new legislation and increased
empowerment of regulatory agencies.

Organizations will be well served by looking at their business models from the consumer and investor perspective, perhaps a different lens than in the past. In the previous issue of frontiers in finance, this need for financial services to rebuild public and consumer trust was highlighted in 'Addressing the trust gap'. Focusing on the consumer and investor perspective also raises the issue of how financial services organizations manage their brand, in order to rebuild consumer confidence in them. In the current
environment, organizations that embrace this may well be the winners while those whose behaviors reflect a disregard for their client base may find themselves with damaged reputations, if not litigation or regulatory costs.

Article author

Linda Gallagher
Principal
KPMG in the US +1 703 286 8248 Linda Gallagher View all articles by this author

1. Financial Services Authority website. Treating Customers Fairly. July 24, 2009.