E-Commerce, particularly e-banking could become more difficult and convoluted! This may sound an odd statement given our focus on this sector and our advocacy for greater adoption of doing e-business in Financial Services. Over the past few years and increasingly so in the last 12 months, we have seen the influence of fraud and security departments beginning to negatively affect the process efficiency that should be possible with e-business.

I was one of the first people to use internet banking when Barclays moved from their PC banking application quite some years ago. As with e-mail, my love of electronic activity is borne from an inherent laziness on my part as I hated the old paper processes that took too much time and effort (‘every second counts’ as one of my hero’s Lance Armstrong would say!).

With my old internet banking process, I had my account number, a membership number, an ID number and password – a similar approach taken by many other online banking, credit card and savings companies since (to varying degrees, some still do today). However, Barclays decided to introduce the ‘pinsentry’ – a calculator-sized piece of hardware that is more suitable to Companies that do online banking – others have followed this trend. The effect on me was to reduce the number of times I access my account and to make the process of carrying out transactions, especially new payments, a real pain! Apparently, Barclay has won some security awards for their system and probably feel pleased with their decision. However, this needs to be considered in the context of customer accessibility and usability as well as security.

I am not advocating a disregard for security and I would not want to have to pick up the bill for some cyber thief clearing my bank account. In fact, when I decided to write this blog, I felt somewhat awkward at raising questions about security when I am also an advocate of protection (my past regulator experience competing with my anti-authoritarian maverick characteristics!). However, I do object to having to put up with inconvenience and cost due to criminal activity in the same way as I object to having to pay for car or burglar alarms. Apparently, criminals carry out relatively small transactions as larger size payments used to draw more attention. The problem appears to be that a set of ‘rules’ automatically detect – AND AUTOMATICALLY BLOCK – ‘suspicious’ transactions, often below £1,000. Perversely, whilst banks try to stop such thefts, they apparently do little to pursue convictions as they are not economical to do so.

In the last 12 months, we have seen personal queries and company queries increase and while this may be the price we have to pay for e-business, it cannot be right that the process is so disruptive! Examples of personal and company queries show that when the ‘fraud/security’ rules trigger a query, they now seem to use a text, or voicemail validation asking several questions to ascertain if the transaction that they have just STOPPED is legitimate. I am happy with the use of technology in this way, but at the end of the process, one may assume that the confirmation that you have just carried out results in a satisfactory ‘clearance for payment’… Sadly it doesn’t!! What you seem to have to do – because ‘that’s the way the system works sir’ – is to restart the whole electronic process and payment again (and hope the retailer/merchant has not blocked you as a ‘poor’ prospect). What this says is that the bank has protected itself and will ostensibly claim to have protected the customer, but the fact that they do not (and claim they cannot) restart the transaction for clearance shows that they are focused on their own interests and not the customer.

The pendulum swinging to greater protection is in danger of making it impractical if not impossible to do business online without having to phone the bank or card company beforehand to tell them that you are going to spend some of your money. However, even making the call is not guranteed to head-off the potential rejection as we found out with Santander just this week. When we phoned to say that a payment would be made for IT equipment with a supplier that was recently caught by the security rules of ‘suspicion’, we were told that ‘the system’ may still reject the payment if the security rules were triggered and the filenote would not necessarily stop the automated procedure. In order to access cash machines and make payments on holiday, it is now common practice [requirement] for custiomers to have to notify banks if you are going abroad (something I used to do anyway).

I personally, and we as a Company, take our banking and credit rating activities very seriously (I pay for the use of several Credit agency ID and credit alert systems). With the planned removal of cheques and reliance on electronic transaction methods, it is important that banks and other companies look at how they implement security in a way that makes it impossible or inconvenient to the criminal, not the customer. The experience of the way systems appear to have been designed to-date, seems have ignored the disruption to the customer and be oblivious to the feeling of embarrassment when ‘security rules’ block payments making it look like you have a problem. I suspect that the electronic validation technology has been tested to a degree, but how much testing has been done on the personal impact these systems have remains much less clear. Despite having complained about the experience at Santander (and received compensation), they say that they cannot [will not] change the system!

E-business is a great asset to our modern world and is breaking down barriers to new geographies and markets that would have been inaccessible or uneconomic in the past. We must be sure that the systems and processes are our servant not our master. Convenience and security need to be managed in partnership with the customer at the centre, otherwise the barriers of ‘protection’ will stop the benefits being realised for all.

I recently heard some fascinating stats about social networking:

• If Facebook were a country it would have the fourth largest population!
• The second largest search engine in the world is YouTube
• YouTube has more content on it than the entire broadcast output of US TV stations, since TV began
• Radio took 38 years to reach 50 million users, TV took 13 years, the internet 4 years, the iPod 3 years. Facebook added 100 million users in less than nine months! iPhone applications hit one billion downloaded in 9 months
• There are 200,000,000 blogs of which 54% update at least weekly, 34% post opinions on products and brands
• 78% of consumers trust peer recommendations

In short social networking has a massive power in the market today and yet is still relatively untapped by the Life and Pensions market.

How can social networking help though? Well I believe it is a brilliant tool for enhancing market awareness, keeping regular proactive contact with clients, supporting customer service, performing market research, listening to customers and prospects. The list is endless.

Companies need to think out of the box. Social networking for many has brought down the barriers associated with privacy and personal information (often to a worrying extent) and this creates enormous opportunity for those with the appetite for information on their clients and prospects. A new service Blippy illustrates this perfectly; it allows consumers automatically to push out purchase details (sourced from their credit cards and retail accounts) in a style not dissimilar to Twitter. It then allows discussion on the purchases. Personally I find this quite baffling that individuals would expose themselves to this level of public scrutiny but they genuinely do – and in doing so provides a wealth of information to retailers, be they high street or financial brands. The lesson is to take nothing for granted and to think creatively.

Another scary example is the openness the more progressive brands have to feedback. Taking on user generated comment in a bold manner, companies like HSBC actively seek feedback, positive and negative and publish both on their websites. While the concept is scary, it has logic at the heart of the proposition. If clients have negative feelings it is better to know about them and address them. If your service is genuinely market leading, keeping tabs on market sentiment can enable companies to address issues as soon as they arise rather than waiting for resentment to build up, by when recover of the damage to the brand becomes really difficult.

We live in a world that when service is received it is instantly posted on different social media and communicated around the world. This can be passively achieved or positively encouraged. Those brave enough will add features to online facilities to let people post tweets or place comments on Facebook about their service. Firms will provide financial tools to look at their financial position and may share some of the information generated (e.g. Buying my Annuity as Open Market Option made me £x a month better off). The means of communicating is expanding rapidly and should be embraced.

The Life and Pensions providers are behind the times with Social Networking and many say it is not appropriate for such sensitive products. This is very dangerous. A recent survey by Datamonitor showed that consumers are already using online resources to get financial advices with over 50% of respondents claiming to do so. While I accept this is largely for simple products that is in part because they can’t yet access much information for the more complex products. We are seeing some movement and companies like Friends Provident are now tweeting but the industry is still behind the curve and lagging other traditionally conservative industries such as Banking.

IFAs are beginning to embrace Social Media – there is already an IFA Twitter league and a very active IFA Twitter community; Distributors have video on YouTube; Social Forums such as IFALife have active discussion groups. LinkedIn has several active groups that discuss issues such as RDR. If providers don’t join these forums they will miss out on some of the key conversations occurring in the market – often about their brands, products and service.

• Three Papers were issued at the end of March 2010 and now that the ‘dust has settled’, we thought a quick bullet point summary of some of the points might be quite useful…
• Policy Statement PS10/6 with Final Rules following what was proposed in CP09/18 (June 2009)
• Consultation Paper CP10/8 with proposals for how commission and remuneration are disclosed in respect of Pure Protection business – reconciling differences between COB and ICOB rules
• Discussion Paper DP10/2 with much anticipated proposals for how Platforms will be regulated

Key points (summary of the summary)

• Most of what was proposed by the FSA in the June 2009 Consultation Paper CP09/18 relating to adviser labelling, non-advised services and adviser charging are being taken forward
• The final rules have removed the proposed requirements for Product Providers to monitor adviser charges – the so called ‘decency test’
• ‘Restricted Advisers’ will no longer be required to use a ‘mandated’ form of wording when disclosing their advisory status (but status disclosure will still be required)
• The FSA has set out proposals for Product Provider commissions to be disclosed where Pure Protection products are sold alongside investment advice
• Where advisers elect to sell Pure Protection products under the COBS rules, rather than under the ICOBS rules, they will not be required to apply adviser charging requirements
• A strong and consistent emphasis on establishing and maintaining systems and controls – we believe that technology will be a key mechanism to support this requirement
• The FSA acknowledges that changes to some of the rules and proposals may be necessary once the outcome of the European Commission’s work on Packaged Retail Investment Products (PRIPs) and the review of the Markets in Financial Instruments Directive (MiFID) are known
• No factoring will be allowed for Adviser Charges
• No dilution of Professional Standards (including QCF level4 threshold) being applied to independent and restricted advisers (with the only exception being Basic Advice)
• The FSA’s conclusions on whether increased professional standards should be applied to pure protection advisers will be published in June.

Market and Distribution

• As expected ‘Adviser Labelling’ will require advisers to describe their services as either ‘Independent’(unbiased and unrestricted) or ‘Restricted’ (single-tie, multi-tie, simplified, or basic advice)
• The definition of ‘Retail Investment Products’ now extends beyond ‘packaged products’ to be much more wide-ranging and this may be amended further depending on the PRIPs review
• ‘Relevant Market’ comprises all retail investment products that are capable of meeting the investment needs and objectives of a retail client… it is possible for this to be focused such as on ‘ethical’ investments or maybe on what products are suitable to meet the needs of charities or trusts – but it is felt this will be the exception not the norm
• It is not proposed to introduce a new regime for regulating ‘Simplified Advice’
• There will be no ‘safe harbour’ from how the Financial Ombudsmen (FOS) may deal with customer Complaints under Simplified Advice, the FSA has said that the best way of avoiding problems will be to ensure that advice given to customers is ‘suitable’ to their needs
• ‘Basic Advice’ will continue for ‘Simplified Stakeholder’ products
• Money Guidance was not specifically covered, but the timing of the recent publications coincided with a national roll-out of Money Guidance following pilots in the NE &NW of England

Adviser charging

• As expected, Adviser firms should only be remunerated through adviser charges for any investment advice on retail investment products that they provide to retail clients
• The final rules will require firms to disclose charging structures for services (‘menu’ of charges) and total specific adviser charges (price of the meal chosen)
• The FSA does not intend to set expectations of firms’ charging structures. However, it has said that it may publish examples of good and bad practices following further discussion with the industry (most likely when it has more experience/evidence of what is being done)
• Ongoing charges may be made for ongoing services. However, firms must provide:
• details of the ongoing service and associated charges, along with how clients can cancel the service
• a clear explanation of the ongoing service and charges in way that is fair and not misleading
• monitoring systems and controls that ensure clients receive the ongoing services they have agreed to
• Advisers will not be able to receive additional income outside of adviser charges in relation to Distributor Influenced Funds
• When determining whether product provider commission can continue to be received on ‘old business’ sales made before the new adviser charging rules apply, firms will be have to assess whether the product is essentially unchanged (commission can continue to be received), or if the change has materially resulted in the product becoming a different product (the new adviser charging rules will apply)
• Adviser Charging for vertically aligned businesses applies in a similar way to other distribution models with a clear separation of product and adviser charges with no cross subsidisation
• Debate about Fund manager charges revealed complexity and potential for tax charges when looking at issuing different share classes to enable charges to be recovered. The FSA feels that it is better to deduct charges before the investment allocation is made (Wrap Platforms often use Cash Account)
• Non-advised services will not be subject to adviser charging rules at this stage
• No inducements that conflict with adviser obligations to act in the customers best interest and that do not enhance the quality of service for the client
• It was proposed that ‘Factoring’ services would not be allowed by Product Providers, but following discussions with the industry and OFT, the FSA has decided they should ban factoring and loan funding of adviser charges from whatever source

Platforms

• The FSA has raised a number of issues that are likely to result in changes to the way Platforms are regulated under RDR
• They have re-labelled Plaform Providers as Platform Operators
• They want to look at how Platform Operators are remunerated, how adviser charging should operate through the Platform and how independent and restricted advisers use Platforms
• They want to improve transparency of charging so that it is clear to the customer what they are paying, for what service and what value they get as a result of using a Platform
• The FSA acknowledges Platforms are a service, but says they have product characteristics and ownership relationships that could cause potential issues and conflicts
• The FSA is proposing to prohibit payments from Product Providers to Platforms in respect to advised retail investment business.
• Platforms will be expected to obtain and validate instructions from a customer to pay adviser charges.
• The FSA emphasises the importance of the transparency of cash account charges and the way in which cash accounts are managed and funded.
• The FSA has proposed to prohibit product providers from deferring, discounting or rebating product charges in a way that could appear to offset any adviser charges
• There are mixed views about whether using a single Platform can be independent
• ‘Vanilla Wrappers’ not necessarily being a Provider Product was also raised
• Platforms will not necessarily be expected to offer all Product choices or all funds
• The issue of assessing need, choice, value and both current and ongoing suitability as well as best execution will most likely create a subsidiary need for ‘research and selection review’ functionality/software services and we are aware of developments being at an advanced stage for such services

This is a very brief (believe it or not) summary and there is much that we have not included or expanded upon. There are significant implications for Providers, Distributors and Services and Technology suppliers. All have major interdependencies and so need to consider not just how they are directly affected but how other parties will be and how they might respond as a result.

Written by Mark Thelwell - Visit Website