Competition erodes trust in financial services
Friday 15th July 2011
Voracious competition over headline prices in financial services comes at the expense of product quality, undermining consumer trust and compounding inertia, according to a new report by think-tank the Social Market Foundation.
Instead of focusing solely on boosting the competitiveness of the financial services market, the Government should also create a "trusted product" kite-mark scheme to improve the quality of financial products.
The SMF analysis finds that financial services markets are highly competitive for new customers, but loyal ones get a raw deal as a result. Financial providers compete avidly for new customers, who are usually young people, through offering them cash, "teaser" interest rates and cheap insurance premiums.
But these are often cross-subsidised by unfair practices like hidden charges, interest rates that fall over time, and reduced insurance coverage, eroding consumer trust in providers. New polling reveals that inert and confused consumers are ripe for the picking. Strengthening competition without tackling provider reliance on customer inertia will make these problems worse.
Report author John Springford said: "From the Independent Commission on Banking's interim report, to George Osborne's Mansion House speech, policymakers are pinning their hopes on greater competitiveness in financial services to make the market work for consumers.
"Competition can be a great thing for consumers. But our research has found that in the financial services market, where complexity makes it hard for people to assess value, price competition leads to hidden charges, poor coverage and acres of small print. No wonder they are confused and mistrustful. The Government needs to step in and lead the market towards healthy competition on quality rather than damaging price competition."
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