Customer Issues in Financial Services - Case Study Example

Issues in Financial Services Introduction: In the context of the United Kingdom (UK), servicing entails the following aspects: Profits Pricing Penalties and Exclusions It is seen that a lot of major changes have occurred in customer servicing sectors in UK and the emphasis has clearly shifted from customer servicing to profit maximization. This is because most products and services segments now operate in highly competitive environments and it is therefore necessary that profit making is one of the main criteria for business performance. Again, pricing is linked with profits and customer satisfaction. In most competitive and free markets, pricing is determined by the forces of demand and supply. In the case of oligopolistic markets, where few major players dominate the business, they are in a position to dictate pricing terms, often to the detriment of smaller players who do not have the material resources or pricing strategies to match the big players. The next aspect, pricing, depends on who has the upper hand, whether the buyers or the sellers. If the goods are freely available and competitively priced, definitely, it is the buyers who have the upper hand, but if there are shortage of goods and its suppliers, with high demand, definitely it would be the sellers who would call the shots. The aspect of penalties arises due to non-fulfilment of contract, or breach of trust on the part of the concerned parties. This could be due to external or internal factors, but which nevertheless influence the performance, or non-performance of the contract, to such an extent that Courts award penalties to be paid to the aggrieved parties. Under UK Contract Act, there is a commitment on either side to deliver, and breach of this delivery could give rise to penalties. However, it is to be borne in mind that Courts assess the penalties based upon actual losses sustained by the aggrieved parties, and not on contingent, or assumed profits. Thus, it would be well within the powers of the Court to allow for actual losses sustained by aggrieved parties, but not future loss of profits. Coming next to the aspect of exclusions, it is often seen that many companies seek recourse to such strategies to avoid liability, by invoking exclusion clauses which eliminates, or reduces liability. Thus, the fine print in contracts is sought to absolve parties of their commitments and responsibilities under covenant bindings. Again, the main areas that need to be covered would be in terms of customer satisfaction, complaint handling and how to handle disputes. The main aspect with regard to customer servicing would be in the event when things go wrong between the sellers and buyers. In the present context of retail trade in UK, it is seen that the standard of client servicing has deteriorated over the years, leading to greater proportion of complaints, litigation, etc. It is quite possible that sellers may try to absolve themselves of blame by citing negligence or lack of product knowledge or care in usage by buyers. It is seldom that vendors would accept responsibility for defective goods or lowered quality, or timeliness of services. Therefore, it becomes necessary "To protect consumers from being misled or pressured by a supplier's promotional activities (for example, most countries place restrictions on investment advertisements)." (McKiernan and Cha 2008). This writer believes that this statement could have limited application in the real commercial world of financial services. This is because financial services organizations need to comply with statutory norms, not only in terms of their performance but also in terms of financial reporting. It is now necessary to consider certain decided case laws in UK to understand the impact of contract laws. The first would be the case of Hedley Byrne & Company Ltd v. Heller & Partners Ltd (1964). In this case, the applicant, Hedley Byrne brought action against a bank that vouched for the financial soundness of a client company, albeit with a disclaimer that the information was only for "private use and without responsibility on the part of the bank and its officials." (Encyclopedia: Hedley Byrne v. Heller. 2005). However, when the company went bankrupt, the applicant sought action against the bank for recovery of their dues, but the Court held that the disclaimer was sufficient to absolve the bank of blame. However, this could hold good in the case of Smith v. Eric S. Bush [1990] 1 AC 831 (House or Lords). This case deals with lack of care on the part of the valuer who gave a clean chit to a house, which later underwent major damages after changing hands. The mortgagor, who had relied on the authority of professional valuer, sued for compensation of his losses; the defendants' argument was that the applicant need not have relied on their reports, but should have sought an independent appraisal. However, the ruling was that the buyer had relied upon the opinions passed by the expert valuer, and was betrayed, resulting in losses that needed to be recompensed. In the context of the Contract Act under English law, it could be said that the contracting parties do not wish to exploit the situation for their own advantage. But having formed the contractual obligations and commitments, they need to enforce it in order to protect their own interests, or if acting as agents, for the cause of their principals. The enforcement of the current contract laws are a far cry from earlier precedents, or decided cases. This is because, in the current scenario, it is seen that each case is treated on an individualized basis, and Court verdicts are based upon merits of each case. Again, it is also seen that it is not incumbent upon the Courts to set or follow precedents, and they are fully empowered to pass judgments based upon their own assessment of the case and roles of parties. However, it is necessary to have provided robust justification for their pronouncements which need not always cater to public opinion. Contracts of good faith: It is seen that most financial sectors, especially the insurance sector, depend upon utmost honesty and fidelity among the customers. Thus, it is necessary that before the final contract is signed, the party makes a full and frank disclosure regarding matters critical to the currency of the contract. However, it may sometimes happen, either through deliberativeness or otherwise, that some details may have been missed out, not really intending to defraud the insurance company, but at the time of taking the contract, the proposer may have felt that non-disclosure would be immaterial in as far as the contract is concerned. Thus a smoker may not fill in the columns relating to smoking habits while taking up insurance policies on own life. However, at a later stage, when liability accrues in terms of meeting exigencies, and the policy needs to be paid off by the insurance Company, it is quite possible that it may develop cold feet, and refuse to address the liability due to the beneficiary. For this the main excuse would be that the smoker may not have disclosed the fact that he/she was so, although this fact may not have any material bearing with the present case. Even if the policy holder has died of a road accident, the fact that he was a smoker (undisclosed) may be enough cause for rejection of insurance claim. The fact is not whether the cause of death and the characteristics of the person are mutually exclusive; what is more important is that, at the time of commencement of the policy, the customer had not disclosed all matters which were necessary. Thus, it could be seen that "they must reveal all pertinent facts whether asked for the details or even if not asked! Their answers must be honest, full and correct." (Issues in Financial services- week 1 October 2008). At their discretion, it is possible for claim settling financial institutions to point out certain flaws which being a vitiation of the Contract Law, however minor, is determinable to revoke or grossly undervalue the claims and its eventual settlement. Thus it is seen that from a strict consumer perspective, services may not be of the standard, or level demanded in terms of convenience, speed or regularity. There are several aspects to client servicing like the desire to seek protection from the Government for investments and care and respect as individual citizens in a free country. However, it could be seen that in many financial services segments this may not be forthcoming, leading to distortions and strains in relationships, which may or may not be reconcilable. Therefore, financial servicing segments in UK context need to be overhauled, keeping the best interests of the customers in mind. The contract act could also be seen in terms of preventive or curative aspects, in that preventive laws seek to avoid the commission of wrong doing, or to prevent financial frauds, misrepresentations and other evils. For this, robust and continuous laws need to be framed and implemented in order to take preventive steps or measures to intensify financial security and consolidate financial gains for the company, and the individual investor. Coming to the next aspect of curative financial business approach, audits and analysis could be said to be curative, in that these may take place after the transactions are completed, which in certain cases may also be too late. The cases of World.com, Enron, Arthur Anderson, etc., could all be said to stem from apparent curative financial measures, but of no avail, since the situation had become irredeemably bad. Moreover, it is also seen that in these cases, the control and management being in the hands of the highest echelons, shareholders were kept in the dark of what actually transpired. However, post-Enron, it could be said that with professionalized management very much in evidence, with strong controls by stakeholders, and diversity between ownership on the one hand, and day-to-day management of the enterprises on the other, it is believed that financial services need to act more responsibly and responsively in the current milieu. This could ensure, to a very large extent, that financial distress is noticed much faster and corrective measures are taken to remedy the situation and not allow it to go beyond repair or redemption, as was what happened in the case of giant energy major, Enron, and one of the top international audit and consultancy firms, Arthur Anderson. The importance of financial servicing sector is indeed invaluable since they are the lifeblood of any organization. All firms, large or small, need finance for setting up new projects or for efficiently managing existing ones. It is also needed for day-to-day management of business and smooth flow of work process and business both within and outside the enterprise. However, financial servicing could be marred by lack of literacy on the part of consumers. It is believed that in the UK, many of the customers did not exhibit money sense and lacked numerical abilities. They were more interested in cheap deals as they felt this was justification of their buying skills and consumer behaviour. However, they failed to realize that bumper and discount sales were more expensive in the long run than normal shopping, in terms of quality of goods, after sales servicing and a host of other concomitant factors. According to the Consumers' Association "There are huge problems with financial literacy in the UK. But the strange thing is that even though senior people at the FSA recognize that this is a problem, they seem to regard the extent of their involvement as provision of more fact-sheets and websites."(Issues in Financial services- week 1 October 2008). Coming to banking financial services, it could be said that with internet banking, the segment has become more transparent and therefore lost great deal of its confidentiality and security. When cheques are sent by post, there are high risks that these may be misapplied by a third person. The British laws believe that if fraudulent endorsements are made between the time of the payer forwarding it to the payee bank, the liability for any losses, or fraud would lie upon the collecting bank, whereas, if the illegal endorsements are made after holder in due course, i.e. the payee is assumed to have received it, it would be incumbent upon the drawee bank to accept liability. However, the endorsement process is now on the wane in UK banking circles, thanks to enhanced use of Internet technology and other electronic devices that could possibly address the aspects of banking business. Further, it is also seen that it is incumbent on the part of customers to take extra precautions to avoid frauds, misrepresentations and losses arising out of banking transactions, and seeking recourse to law whenever such situations demand. Conclusions: The issues relating to financial servicing, whether of insurance, banking, housing projects, brokerage, or mortgage business, have assumed centre stage in the context of UK laws. This is because of lack of knowledge or understanding of an average Briton about financial business as such, or even worse, his disinterest in knowing about such financial servicing business in greater depths. Therefore, the need of the hour is to provide professionalized and specialized training to customers, employees and clients about the various facets of financial servicing in this country and how it could be bettered with respect to client servicing and improved communication lines with service providers and consumers. Again, it is seen that the importance of the role of financial service providers would increase manifold and this would bring in added responsibility and burdens to this sector. Thus, it is necessary that proper infrastructure, training and orientation need to be provided to faculty and public in how optimum use of this financial servicing could be made, without seeking recourse to illegal or questionable methods. In this context, it is also necessary to upgrade financial services to current levels, and thus contribute better to the national economy and the betterment of the people, in terms of economic growth and rise in per capita income brought about by better usage of assets and its deployment over time. In this context, it is also necessary to reinforce existing commercial laws governing financial transactions and movement of credit instruments and in the event they are not effective, to introduce stringent measures to tackle the inadequacies and pitfalls in the existing machinery through a series of well-defined and meaningful reforms in the financial sectors of the United Kingdom. Bibliography Encyclopedia: Hedley Byrne v. Heller. (2005). [online]. Nation Master.com. Last accessed 27 February 2009 at: http://www.nationmaster.com/encyclopedia/Hedley-Byrne-v.-Heller Issues in Financial services- week 1 October 2008. (provided by customer). MCKIERNAN, Susan., and CHA, Angela. (2008). Financial and Credit Services Regulation: Why have Financial Regulation. [online]. Out Law.com. Last accessed 27 February 2009 at: http://www.out-law.com/page-474 Read More