Strategic challenge and treating customers fairly
Speech by Sarah Wilson, Director, FSA, to Financial Advisor Expo
22 September 2005
Thank you for the opportunity to give your Keynote Address – I am delighted to be here. I'd like to congratulate the organisers for putting together such as good programme for today.
This is an interesting time to be involved in the financial advice sector – whether your business is large or small, and whatever mixture of investment, insurance or mortgage services and products you offer to consumers. The importance of the sector is increasing as both the State and employers transfer responsibility and risk to consumers – asking them to buy protection for themselves and to provide for their future. Unfortunately consumers are frequently not responding as they need to – either because they lack the confidence or motivation to engage at all; or because they are unable or unwilling to read, absorb and question the material put before them (so inappropriate products are acquired given individual circumstances).
It is easy to agree that we need to move away from this position – in other words easy to agree that we all (industry, consumers and regulator) want to move to a world where a competitive and innovative retail marketplace is providing quality advice and services to confident and engaged consumers. It is often harder to agree on the measures that need to be taken to achieve that, and equally hard sometimes to drive the requisite change through the business (in the case of changes in the industry) or to achieve a change in attitude and capability (in the case of consumers). The FSA is committed to each of these. Following extensive consultation about change affecting many aspects of the retail financial services sector (de-polarisation, introduction of Basic Advice, statutory regulation of mortgage and general insurance sales), we are now in a phase where industry implementation is key. On the other side, we continue to work with a wide range of interested parties to improve retail consumers' financial capability over the medium and longer term.
So in this wider context, my more detailed agenda today is threefold: to talk about Treating Customers Fairly and the importance of embedding this in your strategic thinking for the business; and then to talk about two developments where you currently have strategic challenges – de-polarisation; and 'A-Day' for pensions.
Treating Customers Fairly
Most roads in the FSA's retail work lead to Treating Customers Fairly – which shouldn't of course be a surprise as it is simply short-hand for one of our Principles for Business (a firm must pay due regard to the interests of its customers and treat them fairly), and you would therefore expect us to take a great interest in your practices in this area and – where relevant – to seek to improve them. However, we launched a particular initiative with this title some eighteen months ago because we saw a need for the industry to look afresh at whether it really took this principle to heart in its business approach, whether it applied it in spirit, and whether – where senior management were committed to it – they actually ensured that it permeated their business and the attitudes of staff in their day-to-day work. Not least, repeated episodes of mis-selling suggested to us that there was a need for a re-appraisal at the highest level in firms if we are to move on.
I should stress in passing that – just as I mentioned earlier that both firms and consumers need to change if we are to make the retail financial services market place more effective – so Treating Customers Fairly does not absolve customers of their responsibilities, nor mean that they are always right. But we cannot expect caveat emptor to apply if customers are presented with products not designed for them and/or if products and their risks are not clearly explained to them. They also should expect to have mistakes resolved quickly and fairly, and complaint handling is therefore something we think is very important.
In the past eighteen months, much has happened. We have published two reports, the most recent in July, Building on Progress, where we explained that large and medium sized firms had made progress, with our work showing a significant number of firms now looking at the implications of Treating Customers Fairly for their business. Two surveys illustrate this point. If, as we have, firms' progress is measured by looking at a process which has four stages (analysis of what needs to be done; planning a response; implementing change; and embedding the results), in Autumn 2004, 36% of firms surveyed reported that they were at the analysis phase, whilst in Spring 2005 86% were at either the planning or the implementation phase. Whilst the sample sizes were different, there clearly is significant progress.
While the treating customers fairly initiative is just as relevant for smaller firms, we are of course aware of the distinctive practical issues that their business model presents. Earlier this year, we published a booklet on what it means for small firms. We intend to continue to stimulate discussion of good practice, working closely with relevant trade bodies and industry representatives.
In our most recent publication, we drew attention to the importance – whatever your business size - of considering the fair treatment of customers when contemplating any strategic change to the business. We stressed that Treating Customers Fairly should be considered when looking at business case development, when planning, and then when monitoring the impact. As I move to discuss de-polarisation and A-Day for pensions, the question I leave you with is 'are you, whatever the size of your business and however formalised your decision making and planning, thinking about Treating Customers Fairly as you absorb these two strategic challenges?
De-polarisation
De-polarisation is the biggest change to the rules for the sale of packaged investment products since regulation began. After extensive review and consultation the new 'depolarised' world came fully into force nearly four months ago. As you will appreciate, it is still very early days and we will need to give the market time to adjust before we can conduct proper analysis of its effects.
But, firms' initial challenges were to determine their new business model in the light of the new freer market-place, and to ensure that they complied with the new disclosure rules where relevant.
On business model, our observations so far are:
- Most small IFAs have opted to maintain their 'independent' status. In other words, they will offer whole-of-market advice and give customers the option of paying with fees for that advice. This means they have needed to consider how to price their services – often for the first time.
- Elsewhere in the market, a number of previously tied firms have moved toward a multi-tied proposition. This has expanded the range of packaged products they offer to their customers. Others have decided to remain single-tied and others again have chosen to fill gaps in what they offer rather than fully multi-tie. With appropriate disclosure, this all adds up to wider choice for the customer.
On disclosure, it is important that firms not only provide the right information (including, for example, comparative information about market commission levels), but do so at the right time (earlier in the advice process than they have typically done). We are currently reviewing a sample of firms' new disclosure documents and early results suggest that, while some firms were getting it right, others need to check again that they have implemented the changes correctly. For example:
- Prescribed text needs to be used correctly. Some firms are substituting their own text for prescribed text or adding their own additional text – consumers may mis-understand the content if previously researched and tested text is not used.
- Documents need to be stand-alone. Some firms have combined the new disclosures with material of their own - consumers may misunderstand the importance of the documents if combined in this way, particularly if they become very lengthy as a result.
- Commission levels need to be disclosed in a comparable way, remembering to include the firm's maximum and the market average – consumer understanding will be improved only if the researched FSA approach is used.
As might be expected with a major change of this kind, there are areas to improve and we will work with firms to help to ensure that any lessons are learned promptly. Alongside the market structure changes which we expect to increase consumer choice, disclosure is key to the new regime. Consumers need clear, straightforward and comparable information, which will help their understanding and build trust and confidence - so it is important to get this right.
Beyond the initial decisions and work to ensure compliance, firms will then face a second set of challenges as they respond to the decisions of others and the resulting evolution in the marketplace.
- firms offering a fee payment option will need to monitor whether it is set at a level that makes their business viable in the face of competition and the need to treat customers fairly through the quality of service provided;
- as consumers respond to the new choices available, firms will need to react to their new needs and preferences – they will need to market the benefits of their chosen business model; including where relevant the benefits of 'independence';
- part of the response may be to segment their customer base – offering perhaps whole-of-market advice to some customers, a limited range of products to others, and Basic Advice in other circumstances – enabling them to offer services to more customers than was previously economic. (As long as staff training and disclosures keep up with this so that customers understand the service on offer and a good service is provided, this is entirely consistent with treating them fairly.)
As you would expect, we are going to conduct a review of how depolarisation is working in practice. The first stage is to check compliance with the new rules. We have already started this – through, for example, exercises such as the disclosure survey already mentioned, and on-going firm supervision. Thereafter, and over longer time periods as appropriate, we will review the extent to which firm and consumer behaviour has altered.
A-Day
The second strategic challenge that I would like to turn to is A-Day for pensions. Today's programme includes sessions on A-Day – and others better qualified than me will look at the technical detail. My focus is regulatory.
A-Day (which, of course, takes effect on 6 April next year) is very significant for those of you who deal with the complexities and intricacies of pensions on a regular basis, and who advise consumers on a product which they find particularly baffling. It is clear that much work is going on in many firms but, with just six months to go, both firms and advisers now urgently need to start planning for the changes if they have not already done so. While many consumers will not be affected by the new regulations, the FSA considers that the challenges for pension providers and financial advisers are substantial, and we are treating the risks associated with A-Day as a priority. We are currently looking at the state of readiness of a sample of regulated firms, and will use this information in future discussions with the industry.
Firms must make sure that they have considered the business and strategic impact of A-day. The new regulations will have significant consequences for most pension providers, and their systems (including perhaps old IT and legacy systems) and controls will need to be updated to cope with these changes. Providers of both active and closed pension funds need to make sure that the information provided to their customers – including in pension projections and benefit statements - is accurate and sent with no undue delay, to avoid any potential consumer detriment in the lead up to A-Day. In particular, firms should anticipate a rise in the number of consumers requesting benefit statements and projected benefits before A-Day.
Advisers need to be up to speed with their training and competence on A-Day changes. We know that many consumers will not be directly affected by pensions tax simplification changes. However, some of your customers will be, and you need to take this into account.
Some particular examples may help to illustrate what is necessary:
- changes to the options available at retirement and to the regulations on release of tax-free sums mean that some of your customers currently near to retirement may wish to defer until after A-Day. For example, some may wish to take tax free cash from additional voluntary contributions or protected rights funds, or to benefit from the new rules allowing those with small pension pots to take up to £15,000 as a lump sum, rather than purchasing an annuity.
- changes to the minimum age for drawing a pension (by 2010) mean that some of your customers currently planning to retire early need to re-consider the best year in which to do this;
- changes to the regulations on income withdrawal mean that some of your customers may have new choices to consider (as they can withdraw more) but also that those choices have more lasting consequences if inappropriate (as they may not be reviewed in good time).
In addition, there are two future regulatory changes associated with A-Day which you will need to be aware of. First, the FSA plans to consult in October on a proposal that – subject to some additional protections - those advisers who are only authorised to sell insurance products are also able to sell pension term assurance. A-Day will also see the removal of the tax legislation restricting the amount of pension term assurance consumers can buy and this, combined with the effect of tax relief on contributions, means that pension term assurance is likely to become popular for a larger number of consumers after A-Day. We recognise the benefits of reviewing the appropriateness of any existing constraints on access to this product.
Second, the government is expected to consult on proposals to introduce a new regulated activity for personal pensions, meaning that the FSA could be regulating the sale of Self Invested Personal Pensions from April 2007. This possible change arises partly from the government's desire to widen the range of firms that are permitted to set up and run a personal pension. And also to make the regulation of this market, including of SIPP providers, more transparent and comprehensive.
For all the categories of customers affected by A-Day changes, it is important that advisers understand the impact of these changes now. In particular, some customers will face important choices in advance of A-Day It will be important that, in tackling this strategic challenge, firms consider how best to treat their customers fairly.
For our part, we will be communicating with advisors and firms regularly during the next few months to help with the transition through for example, articles in our financial adviser and insurance intermediary newsletters.
Conclusion
If I may, I will finish where I began – social, legislative and regulatory change currently underway present this sector with both an opportunity and a challenge. As the industry chooses its response, the FSA looks forward to its building on progress to date in ensuring that customers are treated fairly.