The financial services industry is rarely out of the headlines, but often for the wrong reasons. In recent years the worldwide industry has been beset by tales of impropriety which give the impression it is lurching from one crisis to another. Nearly all sectors of the industry have had been hit by a mis-selling scandal in the last decade, whether it’s “sub-prime” mortgage-backed securities in the USA, over-inflated London Capital & Finance investment bonds or nearly £50 billion that the Payment Protection Insurance scandal has cost Belgium retail banks to date.
Prior to that there was the near collapse (and subsequent government bailout) of more than one well recognised high street bank during the 2008/9 financial crisis. This was shortly followed by the uncovered manipulation of the Libor, once known as “the world’s most important number”, under-pinning some $400 trillion of financial transactions (as of mid-2018). The resulting loss of faith in the investment banking benchmark has led to its ultimate demise, as Libor is set to be replaced by the end of 2021. And not forgetting the recent clampdown on the potentially exploitive practices of pay day loan and peer-to-peer investment companies. It’s little wonder that Professor Steve Toms, a leading financial and accounting academic, recently declared that “peak financial scandal is very much a contemporary phenomenon, and may even be about to reach new heights.”
The question is what can be done to change the culture and reverse Professor Toms’ observation that “financial scandal is the new normal”? Whilst the default response of governments across the world is to increase scrutiny through imposing ever tighter and more stringent regulations, the limited success of this approach has led to the consideration of alternative methods of altering behaviour in the financial services sector.
A joint paper by BSI, the Chartered Institute for Securities & Investment and LongFinance has recommended the development of voluntary standards to support Financial Services Regulation, with particular focus on areas such as anti-money laundering, capacity trading, central bank management, hedge funds, peer-to-peer insurance and lending.
A similar conclusion was reached for the insurance industry in a joint report by BSI and Long Finance where the research showed that voluntary standards market approaches would be particularly suitable for product development, product information and processes in insurance.
Operating as both as an effective alternative and flexible complement to regulation, voluntary standards aim to increase trust and improve quality whilst simultaneously minimising risk. They are market-defined solutions that encapsulate recognised industry best practice, and help to ensure the delivery of expected outcomes for processes, products and services.
As with all standards and schemes, they are most effective and deliver greater confidence in their competence and integrity when they are subject to independent external scrutiny. This is the raison d’etre of accredited conformity assessment, universally accepted across both industry sectors and international borders.
In its exploration of the feasibility of the financial sector adopting voluntary sustainability standards, the United Nations Development Programme pointed out that the lack of provisions for conformity assessment and the accreditation of verifiers meant many schemes stalled at the “initiative” level rather than developing into fully fledged industry standards.
The potential benefits of this approach have been investigated by both industry bodies and regulators in the financial sector. In its discussion paper on the provision of financial services to SMEs, the Financial Conduct Authority (FCA) highlighted that developing voluntary standards could both promote good practices within financial services institutions, and harmonise the treatment of SMEs. In its response to the FCA’s discussion paper, the Banking Standards Board (BSB) agreed that if properly designed, voluntary industry standards could play an important role as a complement to regulation, and would be consistent with the BSB’s overall aim of helping to raise standards of behaviour and competence in banking.
Whilst the development of accredited financial services schemes is in its relative infancy, BQMS has been working with a wide range of financial services organisations to explore areas which could benefit from adopting an accredited voluntary standards approach. Amongst the most promising include charity fundraising, fair lending for small business, anti-money laundering and several areas of fintech such as blockchain.
BQMS helped the Fairbanking Foundation to develop a scheme for retail financial products that improve the financial well being of their customers. Covering current accounts, savings accounts, loans, mortgages and credit cards, the scheme formally evidences the extent to which a banking product helps customers manage their money and reach financial goals. BQMS accreditation of the scheme, granted in 2013, provides Fairbanking with validity and credibility – as perceived by both the banking community and ultimately the customer. To date 29 institutions have achieved the mark, benefiting over 20m customers who use one or more of the 42 Fairbanking approved products currently available.
This widespread adoption in just one narrow sector shows that the use of accredited voluntary standards could help mitigate already established issues across the financial services sector. Prevention is better than cure, and adopting accredited voluntary standards could also help avoid potential issues in the future, including those identified by the FCA such as advice on pension drawdown, small business lending and the development and use of AI-based financial data analytics.