SPEECH GIVEN BY ANNA BRADLEY, CONSUMER DIRECTOR, FSA,
TO THE BUILDING SOCIETIES ASSOCIATION CONFERENCE,
HARROGATE, MAY 8th 2003

Today I have been asked to speak about how to treat financial services customers fairly. This is obviously a very important question. The FSA sees its goal as maintaining efficient, orderly and clean markets and helping retail consumers achieve a fair deal. In the FSA Handbook, Number 6 of the FSA's 'Principles for Businesses' requires firms to 'pay due regard to the interests of its customers and treat their customers fairly'.

In past publications we have indicated that in our view such fair treatment includes at least the following aspects:

Refraining from exploiting customers

Disclosure to the customer of material information

Honesty, openness and transparency

Acting with integrity and in good faith, and with competence and diligence

Honouring representations and assurances where these have lead to a legitimate expectation in the mind of the customer

Being reasonable about putting things right for which one is responsible for having gone wrong.

Treating like situations alike and differentiating appropriately between different ones

These ideas are thoroughly consistent I would suggest with the high level commitments made in the recently revised Banking Code and in the Mortgage Code. Today however, rather than focus on the details of the current regulatory framework, I would like to offer some broad remarks on how these notions of fair treatment can and need to be delivered by firms in practice.

Buyer Beware

First I'd like to touch briefly on the place of caveat emptor, a recurring concern of practitioners.

The Financial Services and Markets Act states that the FSA must have regard to ‘the general principle that consumers should take responsibility for their actions’. We therefore aim to pursue our consumer protection and consumer awareness objectives in tandem, in a balanced way. We adopt a two-pronged approach: setting, monitoring and enforcing standards for firms; and providing - or requiring others to provide - education, information and advice for consumers.

An essential element of an effective regime is consumers who are equipped to make financial decisions which are appropriate to their circumstances. This requires a basic level of background knowledge and understanding on their part. This is why we have invested in work on consumer education for children and adults and have plans to do more of this in the future. Building on this background knowledge, consumers then need clear and objective information about specific products and services, to help them exercise informed choice. To assist with this, we are giving priority to projects such as reforming the product disclosure regime and focusing greater attention on the quality of financial promotions.

Once consumers have the necessary information in appropriately clear and accessible form, we expect them to use it thoughtfully and to take responsibility for their own decisions. The corollary of this is that if they make a decision, while in possession of appropriate information, which subsequently turns out to be incorrect or unwise, they should have no redress through the regulatory system. The regulatory system cannot protect consumers from performance risk, providing that risk has been appropriately explained at the outset. We believe that, just as firms can mis-sell, consumers can mis-buy and this sense of responsibility must be present in our work with consumers.

Firms' responsibilities

However, we are equally clear that the "buyer beware" principle must not be used as a justification for misleading consumers, either wilfully or accidentally, or for other means of taking advantage of them.

It's a fact of life that many financial services are somewhat intangible and unspecific of purpose, lacking the immediate utility of a washing machine. As a result, their sale inherently involves an imbalance of power and knowledge between the firm and the retail customer and it is important that firms do take account of this positively in their dealings.

This in turn means that irrespective of whether requirements are statutory or voluntary, it is important that firms comply intelligently with their spirit. Too often in practice such provisions are interpreted by compliance departments in a narrow way and as a defence for the firm, and applied as such, such that the spirit may become secondary or even lost. This can cause a vicious circle, as it may force regulators or code makers into having to provide ever more detailed rules or guidance - which compliance officers then proceed to re-interpret still more finely. This can lead to burgeoning rule books or ever lengthening codes and a constant lag behind the latest product innovation. So a broader perspective from firms is desirable, focused on ensuring an entire culture of fair treatment.

In that sense fairness is too important to be left only to compliance departments. The consistent message we have received from practitioners is that for a firm to achieve fair treatment for its customers the will has to come from the very top and then be communicated through the organisation.

Where staff within firms are well trained, properly incentivised, adequately briefed and empowered, and have clear and fair customer relationships strategies to follow, the firms relationship with the customer is likely to be enhanced.

Ensuring fairness through systems and controls

As this suggests, we do not view 'fairness' as some stand alone question . Rather it is integral to senior management responsibilities, and in particular their obligation to control the risks in their business, including through the product life cycle, to which I now turn.

Strategy

As my colleague Carol Sergeant stated to the BBA last winter, the consumer, your customer, is having to take responsibility for deciding how much to save, when to save and what savings instruments to use - in many cases for the first time in at least 2 generations. They will also have the usual liabilities – mortgages which is the dominating financial commitment for most and consumer debt both of which are at historically high levels - and some new ones, for example student loans.

Such developments will affect both existing portfolios of consumer products and relationships as well as the prospects for new products and initiatives. These risks need to be considered explicitly and strategically.

In particular management must consider what is a responsible level of return on capital, and sales levels to aim for. Crudely put, a senior manager cannot simply wash their hands of a mis-selling sales force if the strategy, targets and remuneration he or she has imposed on them is irresponsibly structured.

Product Design

Sadly, there are still too many cases of faulty products - that is products that were never going to deliver what they promised from the beginning because of a design fault. This has been most conspicuous in investment and insurance products, but it is a lesson that can be applied just as well to other products, including the traditional banking product range that is itself becoming more innovative and complex.

Formalised product approval procedures within firms should take in wider questions than just legal or compliance aspects. For example:

  • Are the products properly stress-tested before launch, to enable the provider itself to fully understand the product’s sensitivity to any major market or economic shift?
  • Is there assessment of the knock on effect of such sensitivity on delivering what the customer had been promised?
  • Is the product as a whole genuinely likely to deliver good value to the consumer? Are its design features strictly necessary to its function - or obfuscatory bells and whistles?
  • Is the product structured in a way that is liable to give rise to consumer detriment through eg high up front charges, hidden penalties and taking unfair advantage of one sided discretion?
  • Can the product be embodied in a contract that is not merely sound from the perspective of English contract law, but fair from the wider perspective of the unfair terms regulations? The Regulations look askance on significant imbalances of rights and obligations to the detriment of the consumer.
  • Do firms know whether the product and its risks is capable of being understood by the target consumer? Do they, for example pay any attention to generic or firm specific complaints data about previous or similar products when in design mode?

This kind of analysis should help prevent some products ever seeing the light of day; or help eliminate features that would have proved problematic in the longer term.

Product Disclosure

Too many products still lack transparency and are virtually impossible for most consumers to understand. Contract and product information is often drafted defensively and in legalistic language, instead of acting to inform the consumer. This makes it very hard to give appropriate weight to the important 'buyer beware' principle. Our impression is that the consumer's capacity to understand the product being offered and its appropriateness for their own circumstances does not always feature very highly in product or market analysis or design.

Those of you who sell or advise on packaged products will be aware of our recent initiatives in this area including under proposals in CP 170 a concise jargon free document called 'key facts' would replace existing product information that consumers receive at the point of sale.

Again however, notwithstanding their different nature, many of the underlying lessons are surely much the same for the increasingly innovative non packaged products being put forward by the banking sector. I would ask: How often and how much do your product designers, delivery channel experts and marketeers test whether consumers really understand the product being offered, its relevance to them and its risks?

More broadly, firms need to think harder about how to render their information transparent and jargon free, and how to put the fundamental messages across in a way that consumers understand. A little more effort and cost at the beginning, can save a lot more in the long run if complaints and mis-selling claims are avoided.

Advertising and promotion standards

Delivered messages should be clear fair and not misleading, as our Principle 7 says. In our experience however, a great deal of promotional material focuses on form rather than substance. In particular the risk reward trade off is too often either not explained at all or relegated to illegible footnotes.

We have recently had cause to write to the BBA and BSA and others highlighting some concerns we had about the promotion of capital protected deposits. Too many of them we felt were more unclear than they needed to be about the risk and returns of the product, the headline maximum returns, the cost of the 'capital protection', and over what it was exactly that was 'guaranteed'.

It is in firms' interests to think about not just whether a financial promotion provides the information which a really well informed consumer could use to work out what they are buying, but whether actual, 'average' consumers can work out what the product is about. Avoiding exaggerated claims and expectations may lose something in eye catching attention grabbing quality, but in the longer run is also likely to save on complaints from those who feel surprised or let down by what they actually get from the product.

And again, as the immediate public face of the firm, it seems only right that the quality, clarity and potential reputational risks of promotions is actively scrutinised at a high level of management within a firm.

Selling and Advisory Services

Those of you whose firms offer packaged products or act as agents or IFAs, or have IFA subsidiaries obviously have to comply with the current rules on advice and also those emerging out of the end of polarisation and the Sandler initiative.

Again however, as we are discussing fair behaviour in general, I would suggest that firms should think about the suitability of all the products they are selling, including those not currently subject to conduct of business regulations.

We are aware of complaints for example that banks have been selling inappropriate payment protection insurance on personal loans, for instance to self employed people who are not in fact covered by the policy. We have received complaints from old ladies with £1000 to invest who were sold by their banks an equity ISA invested in European technology stocks - which promptly collapsed. More generally, I would ask, are all those people being sold short term discounted rate mortgages with long lock-ins genuinely in need of them?

Fair dealing by firms should thus require a genuine exploration of the customer's needs, rather than an opportunistic sale to them of 'this month's product to be pushed'. Such considerations of suitability reflect wider obligations on the firm of good faith I would suggest, and appear to me fully in the spirit of your industry codes.

Ongoing service standards

There can be a real expectation gap between consumers' and firms' perception of their relationship, particularly where customers assume an element of the personal in their relationship which the firm may not reciprocate. But firms often feed this misperception, with their focus on recruiting new customers, with strong brand focus and follow up calls, misleading customers into assuming they will continue to get the same level of personal attention once they have signed on the dotted line.

In reality, there is rarely any after sales information or service to consumers. This is an area we are focusing more attention on. While we appreciate that such information brings costs, and needs to be proportionate to the nature of the product, there seems little reason to think that holders of most kinds of financial products and services would not benefit from receiving periodic and event driven updates, and communications at periods of exit or renewal.

Further, once sold, our feeling is that there is not enough monitoring of the continued efficacy of a product or indeed of any unintended or unexpected side effects. Such monitoring is necessary if the on-going suitability of a product for a customer is to be assessed, and may thus be seen as an important part of the firm's wider duty of care.

Such post-sale efforts may seem expensive and burdensome. But in an increasingly competitive market we know that the costs of acquiring new customers are spiralling. So a little more investment in customer retention may well pay dividends.

Standards for complaints handling and establishment of redress mechanisms

The new DISP regime that has been developed therefore aims to ensure that firms handle complaints fairly, and also record, monitor and report them sensibly.

I won't rehearse the details of DISP here, but I would however just stress the importance we attach to 'treating like situations alike'. Whilst FOS makes decisions on individual cases, a key part of fair behaviour on the part of management seems to us to involve careful consideration of whether an error or mis-hap or ombudsman judgement has impacted negatively on a wider class of customers, and what should be done to remedy this. I am pleased to say that so far building societies have responded well in this respect. As you will be aware, this is part of the 'wider implications' issue which is something we will be discussing in more detail with your trade bodies going forward.

I would also pose the question of whether you and your senior management are paying sufficient attention to the outcomes of such complaints handling process. For an individual firm's management, such data can surely serve as an important source of intelligence about the health of its business and systems. Might not a high level of process complaints be quite relevant to the thorny decision of whether, and how much, to invest in new systems?

At base, such a decision, like many of the other issues I have touched on, reflect on what is perhaps the fundamental question of fairness, namely the distribution of value between customers, executives and owners/shareholders, a question that building societies and their membership have a long tradition of addressing.

Conclusion

So to sum up what is required of financial services firms, I would suggest, is an especially sensitive degree of thought about the relationship with the customer in its various phases and contexts, and specifically, some accommodation to the realities of consumer behaviour. This may well mean going the 'extra mile', in terms of not just relying upon what the letter of the rules or code say, but ensuring a balanced recognition of what is right for the customer. Senior management, right to the top of each organisation, need to continually be asking intelligent questions of themselves and their business lines to consider whether they are achieving such a recognition. For our part as regulators, we are looking not for infallibility from senior management in assessing the spirit of fair treatment in every case, so much as evidence that such matters have been approached in a constructive, thoughtful and responsible way.

As Business Intelligence 2000 noted , 'companies that manage customers well using sensible observable well implemented business practices are very likely to be good business performers. Conversely companies that do not set up good customer management practices are likely to be poorer business performers'.

So fair treatment should raise customer confidence and that has to be good for the overall interests of the financial services industry and for each of your firms.

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