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As part of its recent white paper on banking reforms, the British government has suggested ways in which the financial services industry can re-engage with consumers, including the introduction of a color-coded system more commonly found on food labels. While the suggestion has drawn some criticism, the proposed system should at least lead to greater innovation and competition within the industry.
In its white paper on banking reforms released on July 8, 2009, the British government indicated its intent to introduce a 'traffic light' system, similar to that used on food labels, in order to improve consumer access to basic financial products. This could prove to be a shrewd move, as research conducted by the Financial Services Research Forum in May 2009 found a marked upturn in trust levels in supermarkets over the last four years, and while financial services institutions have consistently recorded comparatively higher levels of trust, the gap between supermarkets and banks is closing.
Anna Large*, retail banking analyst with Datamonitor, explains: “As the white paper noted, financial services and food are clearly very different classes of consumer products, but there are important lessons to be learned from food labeling and other industries to help improve the transparency and simplicity of financial products such as insurance policies, mortgages and pensions.” However, past attempts at offering consumers a clearer understanding of financial products have often been met with resistance. The lack of take-up of individual stakeholder schemes serves as a prime example of how regulators can get it wrong when trying to simplify products and look after the consumer, while capping commissions simply resulted in a lack of incentive for providers and IFAs.
Anna Large adds: “A traffic light system, on the other hand, may prove more successful.” It will almost certainly help to repackage financial services as more digestible and help consumers identify products which more closely meet their needs. Through the new system and through easy access education provided under the Money Guidance scheme, consumers should soon be well versed on the risks connected to their day-to-day financial decisions.
While the traffic light system may be seen as trivializing the industry, with some commentators suggesting a Kite Mark system would be more appropriate, for now the suggestion should be commended. Large concludes: “The fear of red light exposure will incentivize providers to compete and innovate, and that is something which the industry needs a huge injection of at present.”
