What is a good customer outcome?

The consensus is well and truly in – there are rising consumer expectations. Financial institutions have a duty to treat the customers fairly and to do the right thing.

Examples, or even ‘war stories’, that have come to light in recent times have shown that it’s very clear when actions or behaviours have not resulted in a good customer outcome. We know a one size fits all approach does not work for financial advice. And we’ve also seen the costly financial consequences when some of our largest financial institutions have not got it right.

But on the other hand, when is an outcome a good outcome for the consumer? Or for the policyholder, member or consumer for that matter?

Is it possible to arrive at a clear definition that is consistent over time which could be used to measure and assess the effectiveness of an industry development or legislation change from the perspective of the customer?

Perhaps a good starting point is to gather some clues on how our Australian regulators view a positive customer outcome:

• APRA, the prudential regulator of our financial system, has a mandate to “protect the Australian Community by establishing and enforcing prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by institutions we supervise are met within a stable, efficient and competitive financial system.”
• ASIC, our corporate regulator, has as one of its roles to “promote confident and informed participation by investors and consumers in the financial system”.
• ACCC, our competition regulator and consumer law champion, has a purpose to “making markets work for consumers, now and in the future.

We can see here that a common objective amongst these regulators is to enable the individual to participate freely within the financial system and instil confidence that their rights will be protected.

As we now turn to Australia’s wealth management & superannuation industry, the financial landscape has changed immensely over the past 30 years.

The objective of the superannuation system, as proposed in 2016 by the Australian government, is to “provide an adequate income to ensure all Australians achieve a comfortable standard of living in retirement, supplementing or substituting the Age Pension”.

To deliver on this objective, significant efforts to define and improve customer outcomes are being made on multiple fronts by regulatory and supervisory bodies, including:

1. The Productivity Commission stating in a 2016 report that “maximising net returns (after fees and taxes) is the most important way in which the superannuation system contributes to adequate and sustainable retirement incomes.” There have been associated recommendations from the Productivity Commission of displaying a ‘best in show’ list for some of the best performing super funds.
2. APRA’s focus is on “the other end of the spectrum: weeding out the industry’s underperforming tail, where the most damage to members’ interests is done” as communicated in a recent speech from APRA Deputy Chair Helen Rowell to the Australian Institute of Superannuation Trustees Chairs Forum.

It seems that the key objectives of our financial regulators and Superannuation in relation to enabling better customer outcomes are closely linked to the idea of improving financial wellbeing.

Financial wellbeing has historically proven to be a notional concept and has seemed to some as an elusive ‘north star’. However, attempts to better define financial wellbeing have started to emerge within recent years.

A relatively early definition provided within a 2015 report from the Consumer Financial Protection Bureau (CFPB) in the United States explored financial wellbeing through the two dimensions set out below:

To summarise, it is a state of being that allows for financial security and freedom of choice both now and into the future.

The CFPB Report also explores how these dimensions are influenced by two factors: the individual and the circumstances to which the individual is exposed. 

Whilst there are a number of key components, such as financial literacy, which are more under an individual’s influence, areas of industry and legislative change affect the latter factor of circumstance, which are outside their self-control.

Macroeconomic items such as government policy, strength (or lack thereof) of financial market regulation, and the availability of appropriate saving and/or retirement products, play a crucial role in shaping the opportunities available to the individual.

Taking Australia’s compulsory superannuation system and the possible changes noted above as an illustrative example:

• Compulsory superannuation provides the savings opportunity for the individual.
• Removing the poorest performing funds from industry affects the range of funds from which a superannuation member can then consider investing in.
• Highlighting the best performing funds influences member behaviour and ultimately their decision.

An Australian specific definition of financial wellbeing was proposed in a 2017 report involving the University of New South Wales and Financial Literacy Australia.

It contains similar ideas that financial wellbeing is “when a person is able to meet expenses and has some money left over, is in control of their finances and feels financially secure, now and in the future”.

Some of the Australian specific considerations mentioned within this report include:

• The high cost of living within Australia’s largest cities, which can make it particularly difficult to meet financial goals such as home ownership
• How Australia’s ageing population will affect the financial wellbeing of individuals, families and the broader Australian community

As a qualitative definition emerges, the focus almost inevitably is to then develop a meaningful measure of financial wellbeing (especially from an actuarial perspective!).

Whilst an overarching measure could be difficult to apply in all situations (because a causal relationship link would be difficult to credibly establish), other more contextually specific measures should be considered in assessing the customer impact of a specific industry development or legislation change.

One thing is clear – an increased focus on customer outcomes is here to stay.

Given current day realities, financial wellbeing may even need to be considered alongside more traditional dimensions of wellbeing such as physical, emotional/social, mental/knowledge and spiritual in living a life of satisfaction.

Because at the end of the day, isn’t that what it’s all about?

This article is the first in an article series produced by the newly formed Customer Outcomes Working Group – a subcommittee of the Wealth Management Working Group. Future articles in this series will explore specific emerging developments in the Wealth industry from the lens of customer outcomes.

The Customer Outcomes Working Group consists of:

• Rein van Rooyen
• David Millar
• David Carruthers
• Vivian  Yu
• Aidan Nguyen

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