Are we sleepwalking into a future financial services sector that is not fit for purpose?
April 2015 | PROFESSIONAL INSIGHT | BANKING & FINANCE
Financier Worldwide Magazine
What will the financial services sector look like in five years time? It’s a good question, and one which is very difficult to answer. Certainly in 2007 there were few that would have predicted the scale of change that has taken place in the global financial services industry, even if they were concerned about the complacency and risk-taking that was rife in some quarters.
Over the last seven years we have seen seismic shifts in how the sector is structured. Catastrophic failures, emergency acquisitions assuaged by the government and taxpayer bailouts, followed by monumental monetary and fiscal stimulus, stricter regulation and a deep mistrust of banking from the general public. The sector has evolved rapidly as a result of these unprecedented events and is currently fiercely competitive, with a raft of new lending propositions and providers entering the market.
Certainly we will be looking at a very different landscape in five years time. Clearly, knowing exactly how it will look is impossible to predict, but change is surely inevitable, particularly as we continue to rebalance following the global financial crisis.
An evolving sector
At the forefront of the financial crisis, banks have borne the brunt of the consumer backlash and are under increased scrutiny by regulators, the government and the general public – particularly those that were propped up by taxpayers’ money as a result of being ‘too big to fail’.
Clearly, reform was necessary and banks are complying with a raft of stricter rules from a regulator that is looking for conservativism. They have restructured internally and have really cut costs as far as they can go. They are also built on infrastructure and technology from decades ago, which is costly to upgrade and will deliver little return, other than to reduce risks and bolster IT security.
The result of this is that banks are becoming increasingly similar to utilities companies – broadly offering similar products at similar prices. This has provided an opportunity for differentiated service offerings and we have seen a raft of new funders enter the market, as well as an increased focus on so-called alternative funders who existed well before 2007-2008.
Finance houses that existed in the UK 10-15 years ago are being recreated whilst entirely new and differentiated lending propositions are coming out of the fintech space.
The emergence of these smaller players raises the question of what, as a world-leading economy, we want and need to best service our communities and our businesses. Lots of unregulated specialist lenders provide lots of innovation and, in theory, will meet the needs of a wider range of customers.
The danger is that this structure is potentially riskier than a sector comprising more established players. However, an industry dominated by large, established providers would create a less responsive, less flexible sector.
We need to strike the balance between these two extremes to ensure we have a steady, secure yet innovative financial services sector that serves communities and drives economic growth. And whilst we are still in a period of flux, we have the chance to lay the right foundations for the future.
Education is pivotal
A big piece in the financial services puzzle is education. For many years our curriculum has failed to properly educate consumers and future business owners about basic financial skills and decision-making. This is widely recognised and should improve over future generations, but there is still a gap of knowledge among people in their 20s, right through to those in their 50s and 60s.
It is vital that we educate these generations about their financial options and ensure they are able to make informed decisions about the best services for their personal needs or their own businesses. While banks may have succumbed to the most mistrust in recent years, many niche providers or new entrants have also come under fire. The reasons for this criticism may well be entirely justified, but without a proper understanding of the issues it is often difficult for many people to see past the headlines.
There’s a huge amount of education and awareness-raising that needs to be done and the industry – including advisers – and the government both must play a part.
Sleepwalking into our future
To avoid the mistakes of the past it is vital that more debate is focused on the future of the financial services sector and what will serve society best. Is ‘too big to fail’ a positive approach? Are new, innovative providers risky or a healthy alternative? Are our current banks fit for purpose? What would the ideal financial services model look like? How do we adequately educate the general public about their financial choices?
These are questions that should be considered carefully and by a broad spectrum of contributors – industry bodies, regulators, think tanks, leaders within the sector and policy makers. There might not be a definitive answer, but by taking the time to plan our own future and considering how we best service our needs, we will avoid sleepwalking into a sector that does not deliver what is required.
Simon Featherstone is Global Chief Executive of Bibby Financial Services. He can be contacted on +44 (0)800 91 9592.
© Financier Worldwide
Bibby Financial Services