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How financial companies use rules to squeeze customers

A rule book with a gavel hammer on top

Changes in regulations shouldn’t be an incentive for financial services companies to extract extra profits from customers. And yet, we continue to see it happening – so how do they get away with it?

We live in a world where financial services companies invest a lot of time and effort in trying to increase their bottom line, and not nearly enough in delivering good results for customers. As a result, a growing book of regulations has become a necessary evil.

But while new regulations can help tame some of the industry’s worst excesses, new rules often bring new dangers along with them.

The latest ‘opportunities’

At the end of 2012, two significant changes came into force. On 21 December, the Gender Discrimination Directive banned insurers from taking the gender of their customers into account when offering them a quote. A few days later, the Retail Distribution Review (RDR) banned financial advisers from accepting commission for selling investments.

While the gender rules were designed to create an even playing field – bringing potential benefits for both men and women in different insurance markets – the industry was quick to use the opportunity to increase prices for many.

We’ve observed similar opportunism in the financial advice market as a result of the RDR, where some product providers have kept the same higher charges in place, even though they no longer have to pay commission to advisers.

The rulebook won’t stop growing

In an efficient market, I don’t think companies should be able to exploit rule changes this way. But in the financial services industry, there are no major distributors to help bring prices down. The financial advice market is fragmented, and advisers have less power to challenge big companies to reduce their prices.

This means there’s a greater responsibility on firms to play fair with their customers – but this rarely happens. And if businesses don’t put their customers’ interests first, more regulation will follow. By jumping on a regulatory change as a chance to squeeze their customers a little harder, I think they’ve proven they’ve got a long way to go yet.


Gender Discrimination Directive – if the general risk of females compared with males is different – for example in motor insurance (accident risk) and in annuities (longer life) than this should be reflected in the basic premiums and payments. It is not a level playing field if you distort the facts to suit some ill-conceived political correctness. One group will unfairly subsidise the other.
Retail Distribution Review – a financial services company still needs to produce the same profit to support its business if rules change. I would much rather pay a fee to an FSA for unbiassed advice on a product than have them earn a commission when the temptation has been to be more concerned with the money earned than the merits of the product.
You claim FSAs generally don’t play fair with their customers. I must be alone then in using an FSA who has looked after my affairs impeccably over the years.

I agree with Malcolm R except for his last point. I had a very good financial adviser a long time ago. Everything was doing really well until 2008 – we all know what happened then! Unfortunately all of his advice turned out to have very poor returns due to events in the last 5 years.
And pension changes will leave me £23,000 out of pocket as both my and my wife’s retirement ages have been put back by a long, long way. This was a government decision made 18 months ago which was AFTER we had worked out that we could live reasonably well from age 56 to state retirement age and so retired. And to add insult, the latest changes to requiring 35 years of contributions will affect my wife’s pension as she only has 30 years or so contributions (and the Pension Service can’t be bothered to reply to a request asking how many years she actually has). And EVEN WORSE, my pension forecast showed a total state pension including serps as £175 per week. that was due to be reduced to £144 or so, but then more detail came out which means that I won’t even get that because I was contracted out of serps for a while (and I can’t find out how many as the Pension Service have not replied to my request for information) but this government haven’t yet decided how much it will be reduced by. So don’t bother planning for retirement unless you are saving cash.

My conclusion is that no matter how good anyone is at financial advice, changes made by governments and market forces will thwart the best forecasts.
So you may as well not pay anyone to guess at what will eventually work out well for you, as your guesses may work out better, and your guesses are free.

Jeff, I agree about pensions – the loss of tax reclaim on dividends hit many hard and was not forseeable, collapse of Equitable Life, change in pension age. Interest rates hit our savings – who could have predicted that crisis?
We cannot see into the future, that is true. However we have to make some effort to plan ahead, and expert advice is better than guesswork. We’ve had share disasters, but overall even through the crisis our balanced portfolio did reasonably well and is recovering (famous last words). If the Financial Advisers were always right they would be rich men with no need to work for us.
It’s a bit like the Government’s attack on the deficit – things might not be moving forwards as well as we would like, but where would we have been without the austerity plan? Who knows, we could have been a lot worse off like Greece, Ireland, Spain and Italy.