A flimsy piece of paper laying out consumer rights is not enough to protect customers from exploitation by greedy financial firms, claims the vice chair of the Financial Service Authority’s (FSA) consumer panel.
Kay Blair says too much reliance is being placed on the document to help inform consumers about the product they are buying – but there is still a gap in their knowledge which firms can exploit.
The document is meant to be a full disclosure for the client to fully understand what they are buying and to see how it compares to other products.
And that means there is a danger for firms to be ‘over-reliant’ on the paperwork rather than fully explore any questions or reservations a client may have.
Kay said: “There is an unequal relationship between the client and financial company.
Financial services are one-sided
“The issue for financial services is providers with a lot of product knowledge are selling to customers who often do not understand the full details of the purchase.”
And while she welcomed the idea of a document that illustrated the product being bought and how it compared to other similar products it still wasn’t enough to span ‘the information gap’.
The key information document (KID), added Ms Blair, should only be seen as one part of the ‘knowledge framework’ to protect consumers and that more must be done to explain complex products and tackle aggressive and misleading sales tactics.
The FSA’s consumer panel believes the new KID has huge potential to change the way in which financial services products are communicated.
Ms Blair said: “We welcome the Markets in Financial Instruments Directive (MiFID) which states that financial firms must act, honestly, fairly and professionally and in the best interests of customers.
Unclear and confusing
“Financial product consumers need easy to understand products and which have the expected outcomes.”
And she warned that the rewards for a provider selling a certain product to a client should not be led by the rewards of doing so if it isn’t in that client’s best interest.
She added: “Unfortunately, there are some financial services providers who are adept at developing complex products for customers which are unclear and also have confusing outcomes.
“There is huge potential for the KID to help strengthen consumer protection but only as part of a wider communication strategy and should allow a customer to see how the product they are buying compares with a similar product from another provider.
“But the KID must be rigorously tested and its assumptions must be clear and understandable if it is to meet its objectives.”