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Clive Briault, Managing Director, Retail Markets, FSA
FSA Treating Customers Fairly Conference, London,
4 October 2005

Welcome to today's programme of events. It is a pleasure to see so many of you here today. It is a sign of the considerable interest in this subject and shows that the industry is responding to the challenge of Treating Customers Fairly.

Our retail agenda

Treating Customers Fairly is a key element in the FSA's retail agenda. We want retail markets for financial products and services to work more efficiently and effectively, and thereby to deliver through these markets a fair deal for consumers.

What does this require?

Our retail agenda is built on four 'pillars':

• Capable and confident consumers;
• Simple and understandable information for, and used by, consumers;
• Well managed and adequately capitalised firms who treat their customers fairly; and
• Risk–based and proportionate regulation.

So the fair treatment of customers by firms is part of a broader picture. It is complemented by our work on financial capability, which is designed to increase consumer understanding and awareness; by our requirements on firms to provide clear information so that consumers can engage with the financial services market, make informed decisions and shop around; and by our risk-based supervision of individual firms, and our thematic work on particular risks and product types.

In all of this our emphasis is on outcomes and thus on changing the behaviours of firms and consumers in the real world. So, ultimately, we want to measure the success of our treating customers fairly initiative by looking at the difference it makes to your customers, the consumers of financial services and products.

Senior management responsibilities

Treating Customers Fairly is rooted in our statutory objectives and strategic aims. It is embedded in the sixth of our eleven Principles for Businesses, namely that "A firm must pay due regard to the interests of its customers and treat them fairly". So it is, already, a rule in our Handbook, not some vague notion we invented last week.

Our approach has been not to define precisely what constitutes "treating customers fairly", but rather to challenge the senior management of firms to work this out for themselves, taking into account the particular types of business that they undertake. We want senior management – and we recognise that many of you have already done this or are in the process of doing so – to begin by carrying out a "gap analysis", to identify areas of their business where they are not meeting the obligation to treat customers fairly. Senior management will then need to embark on a programme to address any shortcomings, and to set clear priorities and targets to determine how progress will be tracked.

Treating customers fairly needs to be embedded into the culture of a firm at all levels, so that over time it becomes business as usual. This is all very much a responsibility of senior management, not just a compliance issue.

To help you with this we have produced a number of statements of good practice (and, indeed, some indications of less good practice) and case studies to illustrate some of the considerations that senior management should take into account. We published many of these in our July paper, and further case studies on management information, remuneration, complaint-handling, and closing a with-profits fund will be published on our website next week.

We have also suggested that a useful starting point for senior management is to think of treating customers fairly in terms of what we have called the product life cycle. So depending on the precise nature of a firm's business this could mean addressing the fair treatment of customers at any of the following stages: product design and governance; identifying target markets; marketing and promoting the product; sales and advice processes; the remuneration of sales forces and advisers; after sales information; and complaints handling.

Progress is being made

We reported in our July publication the progress that many firms have made over the last year or so in undertaking a gap analysis and in moving forward into identifying and introducing any changes arising from that analysis. I will not repeat those facts and figures here.

I also welcome the initiatives taken by many trade associations to help their members to understand what our treating customers fairly initiative may mean for them, and to provide positive examples of what their members can do to raise their standards in this area. Since Stephen Sklaroff is speaking in a moment, let me say in particular that we very much welcome the ABI's recent announcement of its latest action programme, which replaces its earlier Raising Standards scheme and with a much broader package of initiatives for ABI member companies to improve customer service in the life insurance industry.

I have also been enormously encouraged by what I have found as I have travelled the country.

Let me share some examples with you.

First, at the Building Societies Association conference in Harrogate earlier this year the chairman of a major society spoke about how his society had assumed that a building society could do nothing other than treat its customers fairly. But when they took a closer look at how they designed products they discovered that their product approval controls needed some significant attention, including taking decisions about new products at a much higher level in the society than had previously been the case.

Second, and nearer to home, the chair of a firm of motor insurance brokers explained to me how he had been puzzled by the number of complaints his firm had been receiving. They had successfully rejected all these complaints, but he wanted to know why his customers had been complaining in the first place. It turned out that in most cases this was because his customers had not understood that their claims would not be valid if they had lied about various matters when taking out their insurance cover. So the firm added some wording in big red letters to the relevant forms, telling its customers that if they did not fill in certain details correctly when they took out their insurance then future claims would be invalid. The number of complaints has since dropped to almost zero, from a previous rate of 50 or 60 a year.

Third, at a conference in Scotland last month, all three speakers - all very senior executives of major UK retail groups - in a session on building customer confidence and a successful brand name, referred to treating customers fairly not as a regulatory obligation that they had somehow to meet but rather as an entirely natural way of describing how they had to improve what they offered to their customers.

Fourth, just last week I was pleased to see, while waiting for a meeting with a major banking group, a copy of that group's in-house magazine with "Treating Customers Fairly" emblazoned across the front cover. Of course as a cynical regulator I wondered immediately whether that was the only copy, placed there especially for me, and I did not have time to read whatever it said inside. But to be fair, I have to say that I found that front cover immensely gratifying, proving as it did that not only was that group trying to embed the treating customers fairly culture into its staff, but that also it was possible to do this using exactly the same words that we have been using.

Finally here, when I was speaking at a conference in Belfast last Thursday, an independent financial adviser told me that he had studied carefully our July publication, had considered how his firm treated its customers, had identified some gaps against the examples of good practice we had set out, had documented this, and was in the process of making some changes.

So the right things clearly are happening out there and progress clearly can be, and is, being made.

Myths and realities

I also hear many misconceptions about what treating customers fairly does, and does not, mean. So let me put the record straight on some of these.

First, treating customers fairly does apply to all regulated firms. We hear comments that treating customers fairly should be less of an issue for certain types of products or services. We agree that good practice should be easier to achieve for more straightforward and highly competitive products, including for example household and motor insurance. And we share the view that more complex offers or services may well mean a greater risk of consumer detriment or unfair treatment. However, it is a responsibility of the senior management of all firms to ensure the fair treatment of their customers.

Second, many firms have claimed that they already treat their customers fairly. Indeed, some have questioned the need for them to do anything more on this. But as I have already indicated, we have found from our contacts with firms that, having looked at this issue they have discovered that there was more to do than they had initially thought, because the review process had identified things which they themselves recognised needed addressing. Equally, however, I am sure that there are firms out there that already meet the standards we expect of them. So let me be absolutely clear that we accept that some firms may conclude that they already meet the standard.
Third, our regulatory requirement on firms to treat their customers fairly is not about being ‘nice’ to customers, creating satisfied customers, or requiring all firms to offer the same or the highest levels of service. It is not about inhibiting innovation in new products or services, or requiring firms to design or market products specifically for individual customers. We are not, and do not want to be, a product or price regulator.

Fourth, treating customers fairly does not mean that customers are exempt from taking decisions or responsibility for their decisions.

Fifth, we are not trying to create new rules, obligations, or checklists: treating customers fairly is about the interpretation of existing requirements, and the materials we produce cover factors that firms may want to consider when assessing whether they meet the requirement to treat their customers fairly. The more principles-based approach to regulation that we want to move towards requires that we, as the regulator, avoid a prescriptive approach to telling firms how they should discharge their responsibilities to treat their customers fairly. We have 8,000 pages in our Handbook already; we do not want to add to this. Moreover, rules will not necessarily get us to where we want to be. Such detail may have the benefit of providing certainty, but by definition a very prescriptive approach lacks flexibility and might not deliver the underlying outcomes we are aiming for.

By pursuing a more principles-based approach we are giving you the opportunity to determine for yourselves how to meet the obligation to treat your customers fairly. The approach will be determined by the size and the shape of your business and the culture which senior management wish to embed in their firms. And we will continue to work with the TCF Consultative Group, which has a wide membership covering all types of trade bodies, consumer interest groups and panels. They play an active part in reviewing the initiative and the related published materials. Over the last year, this review of the materials has produced significant consensus.

Sixth, treating customers fairly is not about requiring all firms to match 'best practice', or requiring all firms to follow the same, bureaucratic processes.

I am aware that there are commentators, including some consultants, out there telling firms that treating customers fairly is all about setting up costly systems and extensive governance processes. This is not our position at all. Some firms have found it helpful to use consultants to review their business, but that is not something that we require. Indeed, one of the reasons why we are so keen to publish our papers and case studies is to give firms a clearer indication of what we want them to achieve without them having to follow an overly-defensive approach.

It has also been suggested that we expect firms to gather large volumes of management information to prove that they are treating their customers fairly. Again, this is not the case. Of course, the senior management of a firm needs to be able to know how their business is performing and management information will be an important part of that assessment. So senior management needs to consider whether the information they currently have enables them to judge whether they are treating their customers fairly. But we do not want firms to collect information that serves them no useful purpose. I would also like to be clear that performance monitoring is likely to be much simpler for smaller firms, so these firms will need to collect much less management information.

Seventh, we recognise the challenges that treating customers fairly – and a move towards a more principles-based approach more generally – pose for our own supervisory staff. We are working on ways to make sure that our staff are properly trained and able to take a consistent view on what treating customers fairly means. We are discussing our training plans with our Practitioner and Consumer Panels and with our TCF Consultative Group. We will do that to gain the benefit of your collective input, so that firms know what they should be able to expect from our staff, and so that in turn they will be better placed to alert us if our staff do not perform accordingly.

We have now reached the stage where we are building treating customers fairly into Arrow, our core risk assessment and risk mitigation process. Supervisors will be looking at the approach that a firm has taken to treating its customers fairly, including both the initial "gap analysis" and subsequent actions to address any resulting issues.

Finally, we recognise that one of the reasons why some firms are anxious about our treating customers fairly initiative is that they are concerned about potential future enforcement action. Failure to meet one or more of the Principles has indeed been a feature of a number of enforcement cases in the past. But I want firms to be clear that we are very unlikely to consider enforcement action if a firm has properly considered whether it is treating its customers fairly and has embarked in reasonable time on a plan of action that effectively addresses any identified shortcomings. If we still judge that such a firm needs to do more then we would expect to convey this message through our normal supervisory dialogue.

Equally, however, if a firm has not taken seriously the obligation to treat its customers fairly; if it stands well short of meeting good practice standards; and if this carries the risk or the actuality of significant consumer detriment then we will most certainly consider taking enforcement action against such a firm.

Conclusions

When I last gave a talk on treating customers fairly, at the FSA Summer School, I included a film quiz based on films whose titles conveyed some of our key messages on treating customers fairly. My favourite was Trading Places, which captures the very essence of what we are trying to achieve – put yourself in the place of your customers and consider very carefully whether you would regard yourself as being treated fairly by your firm.

I have given you a broad overview of our approach. The programme for the rest of the day will I hope give you much to think about, and to build upon, in your own approach to how you treat your customers fairly.

I will now hand over to John and Stephen. If you have any questions I would be happy to answer these as part of the panel session.