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http://www.cresc.ac.uk/publications/...nbankingV2.pdf
5.3 Retail: a new kind of regulator
Effective retail regulation needs to target the behaviours and business models of retail service providers (while incidentally redirecting the efforts of consumer education away from literacy and towards prudence). The starting point has to be that retail banking is a utility because households and firms must have access to reasonable payment services, deposit facilities, and savings and loans which are as socially and economically necessary as electricity supply or telephony.
In most utilities there is a generic bargaining power problem because smaller retail users of electricity or telephony do not have the clout to extract security of supply at a
reasonable price (as larger wholesale customers may be able to do); and the essential nature of the utility service is such that the supplier must be put under a reasonable
obligation to supply electricity or water to remote customers and to maintain supplies (e.g. by card meter) to those with bad payment records.
The technocratic Thatcherite solution for these problems in privatised utilities was not governance but a regulator with responsibility for low prices and fair services, and there
is much to be said for appropriating this administrative device and using it for altogether more radical, democratic purposes in banking. The regulator should be advised by a
broadly based retail banking committee and the regulator’s brief should include extending the range of advice available in high street bank branches and changing the
banking business model not simply delivering low prices.
The Thatcherite prototype of a regulator is a former university professor or civil servant advised by micro economists. The origins of the regulator matter much less if the
individual regulator is advised by a broadly based retail banking policy committee. On this committee, representatives of consumer organisations, SME business and the
organised retail workforce as well as NGOs, churches and others who have alternative views of credit in society, should complement expert economic representation. Giant
firm and trade association representation on such committees would be conditional upon explicit, public understandings that the trade accepted limits on its currently preferred
tactics of insider lobbying. The Thatcherite brief is that the regulator should deliver low prices and ensure supply.
There is much work to be done in ensuring supply both in terms of branch provision and insistence that all banks take their share of basic bank account applications. But, while
credit card interest rates need to be reviewed and probably capped, low prices for all banking services are not an end in themselves because prices need to be considered in
the context of the banking business model. For example, charges for current account provision may need to be re-introduced insofar as free current account banking currently increases the pressures for cross-selling.
Certainly, more transparency and less confusion pricing is required.
Finally, a new regulatory regime would try to work out how to build on the competences and motivations of the retail workforce, specifically by outlawing commission and bonus
based pay for performance. Retail advisers should be rewarded for acquiring the knowledge and interpersonal skills to inquire into customer circumstances and not sell
where a product is inappropriate. This requires a new approach to explaining the limits and costs of products as well as standard industry techniques like credit scoring.
This approach is necessary because of the special characteristics of retail banking as a utility which offers complex products that often represent major, long-term commitments
and hard to reverse choices. Individual households can, for example, in other utility purchases easily learn from mistakes and switch their electricity or telecoms supplier; but
this is impossible or difficult with pension plans and such like. Retail banking also offers welfare critical products which can be dangerous or ineffective: revolving loans on
plastic cards that consumers cannot repay or savings and pension plans that deliver little retirement income are not like a mobile phone device that does not work reliably.
Over time the aim here should be to introduce the kinds of safeguards about efficacy and availability which we take for granted in ethical pharmaceuticals.
5.3 Retail: a new kind of regulator
Effective retail regulation needs to target the behaviours and business models of retail service providers (while incidentally redirecting the efforts of consumer education away from literacy and towards prudence). The starting point has to be that retail banking is a utility because households and firms must have access to reasonable payment services, deposit facilities, and savings and loans which are as socially and economically necessary as electricity supply or telephony.
In most utilities there is a generic bargaining power problem because smaller retail users of electricity or telephony do not have the clout to extract security of supply at a
reasonable price (as larger wholesale customers may be able to do); and the essential nature of the utility service is such that the supplier must be put under a reasonable
obligation to supply electricity or water to remote customers and to maintain supplies (e.g. by card meter) to those with bad payment records.
The technocratic Thatcherite solution for these problems in privatised utilities was not governance but a regulator with responsibility for low prices and fair services, and there
is much to be said for appropriating this administrative device and using it for altogether more radical, democratic purposes in banking. The regulator should be advised by a
broadly based retail banking committee and the regulator’s brief should include extending the range of advice available in high street bank branches and changing the
banking business model not simply delivering low prices.
The Thatcherite prototype of a regulator is a former university professor or civil servant advised by micro economists. The origins of the regulator matter much less if the
individual regulator is advised by a broadly based retail banking policy committee. On this committee, representatives of consumer organisations, SME business and the
organised retail workforce as well as NGOs, churches and others who have alternative views of credit in society, should complement expert economic representation. Giant
firm and trade association representation on such committees would be conditional upon explicit, public understandings that the trade accepted limits on its currently preferred
tactics of insider lobbying. The Thatcherite brief is that the regulator should deliver low prices and ensure supply.
There is much work to be done in ensuring supply both in terms of branch provision and insistence that all banks take their share of basic bank account applications. But, while
credit card interest rates need to be reviewed and probably capped, low prices for all banking services are not an end in themselves because prices need to be considered in
the context of the banking business model. For example, charges for current account provision may need to be re-introduced insofar as free current account banking currently increases the pressures for cross-selling.
Certainly, more transparency and less confusion pricing is required.
Finally, a new regulatory regime would try to work out how to build on the competences and motivations of the retail workforce, specifically by outlawing commission and bonus
based pay for performance. Retail advisers should be rewarded for acquiring the knowledge and interpersonal skills to inquire into customer circumstances and not sell
where a product is inappropriate. This requires a new approach to explaining the limits and costs of products as well as standard industry techniques like credit scoring.
This approach is necessary because of the special characteristics of retail banking as a utility which offers complex products that often represent major, long-term commitments
and hard to reverse choices. Individual households can, for example, in other utility purchases easily learn from mistakes and switch their electricity or telecoms supplier; but
this is impossible or difficult with pension plans and such like. Retail banking also offers welfare critical products which can be dangerous or ineffective: revolving loans on
plastic cards that consumers cannot repay or savings and pension plans that deliver little retirement income are not like a mobile phone device that does not work reliably.
Over time the aim here should be to introduce the kinds of safeguards about efficacy and availability which we take for granted in ethical pharmaceuticals.
