£11 billion of consumer detriment in financial services

‘They offer you an umbrella when the sun shines but take it down when it’s raining’. That could be a blues song. In fact, it is what one woman, over sixty, from Wales, told a colleague in my last role when doing consumer research about financial service companies.

There has been a drip, drip, drip of financial scandals over recent decades, tracked by journalists, consumer campaigners and, in most cases, eventually the regulators. I have long wanted, rather than repeat the litany from personal pensions to split capital investments, to develop an estimate, however loose, from this sorry catalogue of the total levels of detriment that UK consumers suffer as a result.

Inevitably, the sources, methodologies and timescales vary,  but my view has echoed the words of Professor Herman Daly, the pioneering ecological economist, who said that it is better to imprecisely right than, if you offer no estimate, being precisely wrong. With input from the Centre for Financial Inclusion, the loose estimate I have done of the big bill for consumer detriment comes to £11.2 billion – and around £32 billion for the five years before.

High levels of consumer detriment don’t necessarily translate into excess profits, although with widening margins in the current market conditions, it may do. What such high levels of consumer detriment shows is that markets are not working fairly or efficiently and that everyone, providers and consumers may lose out as a result. The point is that large-scale, mainstream financial disservices predate the credit crunch by many years.

So far, the response post credit crunch has been blind to the issue of the incentives that drive the performance of financial institutions and it has therefore been blind to the position of mutuals and co-operatives, based on members rather than external investors. It is as if the new regulatory regime ignores the contributions of mutual models, because it assumes that all financial service institutions are basically the same. The otherwise admirable Which? Banking Commission itself made this same oversight just recently.

I hope the Coalition plans do more. The Coalition Agreement, thanks to the Lib Dem manifesto, makes a commitment to diversity in financial markets. But this term disappears when it comes to the detailed terms of reference for John Vickers’ commission on the structure of banking. Here the issue of diversity is sidelined, looking instead through a competition lens rather than an institutional perspective as well.

There is a welcome surge in credit unions. Glasgow is the credit union capital of the UK, where one in five people are members – I have blogged before on their panache and success.

But when you consider the scale of what has gone wrong through the credit crunch and then add in the risks that have not gone away, including economic uncertainty and a property market with residential prices still many multiples of average real incomes, it feels as if we are crossing our fingers and hoping that it works out differently next time.

4 thoughts on “£11 billion of consumer detriment in financial services

  1. I’ve had a special issue / report from the economist (I think) on my desk for a couple of months that I’ve been meaning to share. I seem to remember the headline on the front page is something like, “was that it?”

    Even the financial media – it seems – share your amazement that the markets have pretty much returned to business as normal for them.

  2. To expect a coalition led by the bankers’ party to seriously consider alternative ownership structures is optimistic, to put it politely!

  3. The financial institutions are in some state! All too often we hear of scandal after scandal in this sector and you’re right I think we’re at the tip of the iceberg. What I find astonishing is the poor level of help out there for those who need help and advice with their debts. Local governments are decreasing their support for debt advice. Commercial debt management companies are misleading people into believing debt management is the only route out of debt. “Charitable” debt advice organisations, which are wholly funded by financial institutions, are being recommended right left and centre by the government -central and local- as being the only place to seek debt help because they offer a “free” service. It’s a bit like a drug pusher opening up a free rehab clinic. At least with an openly commercial businesses you are aware of what their agenda is -to make money from your debt problem. Financial institutions don’t do altruism, there is always an angle!

    The finance industry have for too long pulled the wool over our eyes and profited from it. The only way we can stop this is to educate ourselves in the basics of personal financial management. Knowledge is power!

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