REGULATION ALONE IS NOT THE REMEDY TO REGAIN PUBLIC TRUST IN FINANCIAL SERVICES

“Confidence has been badly shaken and needs to be re-built. That’s a big job and it’s not going to be done in a year or two.” Andrew Tyrie, chairman of the Treasury Committee, recently highlighted a key challenge which banks still face even after we’ve left the recession behind – a deficit in public trust (http://www.bbc.co.uk/news/business-29046605).

Trust is a very sensitive element that is easy to lose, but very hard to gain and even harder to rebuild. This is especially true in the financial services sector, where bankers’ bonuses, the Libor scandal and a perceived lack of support for business, have all taken a significant hit on levels of trust.

The evidence available supports this view. Several studies such as the Edelman Trust Barometer, an international comprehensive longitudinal survey, demonstrate that the financial services sector has been the least trusted for years – globally (http://www.edelman.com/insights/intellectual-property/2014-edelman-trust-barometer/trust-in-business/trust-in-financial-services/).There is no doubt: banks will have to make significant efforts to regain their trustworthiness, whether they are dealing with clients, employees, regulators or partners.

What is the financial services sector doing wrong? There is a striking paucity of financial services organisations, such as banks, which have examined how far their trust deficit may be related to their internal culture, and whether recent corporate corruption could be the product of bonuses and the internal short-term individualised reward systems.

Some organisations have already started implementing measures that are supposed to demonstrate ethically correct behaviour. Banks for example invest a lot of money and time in so called compliance programmes, publishing their ethical standard guidelines or hiring new employees to encourage ethical behaviour. Additionally, government regulations have increased dramatically in the last few years to control ethical behaviour in organisations, such as Doff-Frank, the European Market Infrastructure Regulation (EMIR) and the banker bonuses cap. But nevertheless, the level of trustworthiness is still at a historic low point.

So what else has to be done? In a recent study at Coventry University’s Centre for Trust, Peace and Social Relations, we analysed the effectiveness of different measures to rebuild trust in the financial services sector over the last 20 years. The results showed that the impact of regulation is waning and that it is not enough in isolation to build or rebuild trust.

That is not to say that external regulations and controls don’t serve an important purpose. They are still an effective and powerful instrument, as reassuring customers of their expectations of the other party’s future behaviour is fundamental to trust. Other remedies need to be considered to enhance customer’s confidence in this method, such as establishing a more effective regulator, or board of governors who overlook and assure compliance. Monitoring and surveillance offer further external means of reducing the possibility of future misbehaviours. However, as the analysis indicates, if banks are to build long-term and sustained trust, a multi-stand trust development strategy is necessary.

So, what does this involve? Our findings show that banks need to take several approaches to building trust, focusing their attention on three specific areas: (1) external regulations and their enforcement; (2) third party and expert endorsements; and (3) customer satisfaction in terms of the effective delivery of customer expectations.

The last two measures are significant, as our research found that customers require direct evidence, derived either from their own or others’ satisfaction with the services provided, and that they do take note of external endorsements of firms. These two methods also complement one another, as it goes without saying that if banks turn greater attention to customers’ direct experiences, it will in turn increase the number of third party endorsements and goodwill towards the banks.

Today’s consumers want to be engaged in a way that conveys a deeper understanding of their personal goals and values. Financial services institutions have to pay attention to what is important to their customers. Yet, as negative headlines continue, it is increasingly difficult for consumers to trust them when the discussion continues to be about new fees or narrow product offerings– all of which signal a return to the “old ways” of business.

Another key finding of our study is that communication is rather underutilised by banks. We would advise organisations in the financial service sector to focus on communicating shared values between stakeholders and themselves in order to improve their image, reputation and thus their trustworthiness.

The National Australia Bank provides an example of best practice in effective communication with its customers. In response to the financial crisis, the NAB implemented a new company-wide strategy in 2009, which offered customers a fairer deal. For example, the bank created NAB Care to provide customers who are struggling financially with financial hardship advice and loan repayment options (http://sharedvalue.org/how-banks-can-further-client-prosperity).
With these findings in mind bank leaders should start rebuilding trust in a sustainable way – by putting customers and society first and foremost.

Dr Ann-Marie Nienaber, Reader in Business Management at Coventry University, Centre for Trust, Peace and Social Relations