Treating Customers Fairly
Speech by Clive Briault, Managing Director, Retail Markets, FSA
Insurance Sector Conference
20 March 2006
John has already spoken this morning about how we are taking forward our work on principles-based regulation. Our Treating Customers Fairly initiative is an excellent example of one area where we are looking to apply a more principles-based approach to achieve our desired outcome, in this case the fair treatment of customers.
I will explain to you how this work fits into our wider retail agenda; give some examples of what we expect the senior management of firms to do in order to embed the Treating Customers Fairly principle throughout their businesses; update you on progress made specifically in the insurance sector; and highlight some areas where further progress needs to be made.
Outcomes
Our retail agenda focuses on delivering an effective and efficient retail market for financial services and products, and through this a fair deal for consumers. This requires:
- capable and confident consumers;
- clear, simple and understandable information provided for, and used by, consumers;
- soundly-managed and well-capitalised firms who treat their customers fairly; and
- regulation that is proportionate and risk-based.
One of our key priorities for delivering this agenda is our "Treating Customers Fairly" initiative. The requirement for firms to treat their customers fairly is firmly rooted in our Principles for Businesses. Principle 6 states that “a firm must pay due regard to the interests of its customers and treat them fairly”. So this is not a new obligation. We are giving it renewed emphasis to encourage firms to consider for themselves how they deliver fair treatment to their customers. 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.
Our work on Treating Customers Fairly 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 effectively 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.
Approach
Our approach to Treating Customers Fairly 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. 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 very much a responsibility of senior management, not just a compliance issue.
Embedding means that the fair treatment of customers is established throughout the business. We will be looking for evidence that firms really have incorporated Treating Customers Fairly throughout their operations and processes. We will be looking not only at systems and controls, but at all aspects of the business culture. This will include people issues such as training and competence; remuneration; and performance management. We also expect senior management to ensure that they have the right management information and other data to enable them to satisfy themselves that they are treating their customers fairly in practice.
We see embedding as a continuous process – firms must understand that this is not a short-term project that can be completed and then put to one side. Firms need to show that Treating Customers Fairly will be reflected in their processes and strategy going forward. As I said at the outset, not only is Treating Customers Fairly an important tool to help us achieve efficient retail markets but if it is to have any real meaning it must lead to real change in the behaviour of firms.
So, in the early stages of our work we asked senior management to begin by carrying out a "gap analysis", to identify any areas of their business where they were not meeting the obligation to treat customers fairly. We then expected senior management to consider what was needed to address any shortcomings, to embark on a programme to address these, and to set clear priorities and targets to track progress.
We also suggested that a useful starting point was for senior management to think of treating customers fairly in terms of what we have called the product life cycle. Depending on the precise nature of a firm's business, this could mean addressing the fair treatment of customers at 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. Many of these stages in the life cycle are relevant to all general and life insurance firms.
And that of course includes small firms. We expect their management also to undertake a similar self-assessment. We appreciate that the management of these firms will have fewer resources to devote to this and we have been working with smaller firms to help them with the challenges they face. Indeed, only last week we issued a self-assessment tool for small firms to prompt them on some of the areas on which they should focus in order to be satisfied that they are treating their customers fairly. We also offer industry training on Treating Customers Fairly specifically for small firms.
Compliance with our more detailed requirements remains important. But in general we have encouraged firms to move to a more principles-based approach, supported by the examples we have produced of good (and less good) practice and by case studies to illustrate some of the considerations that senior management should take into account. We also continue to work with our Treating Customers Fairly Consultative Group, which has a wide membership covering all types of trade bodies, consumer interest groups and the Financial Services Practitioner and Consumer Panels. They play an active part in reviewing the initiative and the related published materials.
Progress
There are some encouraging signs of progress in the insurance sector.
We are seeing real engagement from the industry and from trade bodies. We have been supportive of the Association of British Insurers' (ABI) work on the successor to its Raising Standards scheme, which is due to launch next week. We welcome the fact that this new initiative for the life, savings and pension industry will require a formal Board commitment by companies to a set of customer promises. This is designed to reinforce senior management commitment to serving customers’ interests at each stage of the customer relationship. Placing senior management at the heart of the firm’s commitment to its customers should play an important role in helping firms meet their obligations to treat their customers fairly.
We believe the ABI's proposed “Good Practice Guides” for firms to be complementary to the work we have done on our own case studies and other thematic work. But we also recognise that the ABI initiative is not intended to be one and the same as our Treating Customers Fairly initiative. Our particular challenge to firms is the assessment and measurement of “fairness”. Firms are also interested in customer satisfaction, but satisfaction is no guarantee that customers have in fact been treated fairly. Abiding by industry codes and signing up to trade body initiatives should not be regarded as a safe harbour or as a guarantee that a firm will treat its customers fairly.
We have also been pleased to note other examples of encouraging consumer-facing initiatives by the ABI, such as the joint factsheet with the Association of Independent Financial Advisers (AIFA) on the state second pension; the information the ABI provides to consumers to help them understand products better, particularly in times of crisis such as in the aftermath of the Asian tsunami; and being responsive in updating statements of best practice to reflect market issues and the concerns of consumer groups, as was done with the Statement of Best Practice on critical illness.
From our supervision of, and other contacts with, firms in the life and general insurance sectors we have seen many encouraging and positive examples of real progress towards Treating Customers Fairly.
In some firms we have seen the establishment of clear senior management responsibilities – and project processes more generally – to drive forward a decisive move towards Treating Customers Fairly.
At the product design stage, we have seen firms involving customer representatives and making good use of consumer research in order to design simpler and better understood products. Some firms have also made good use of the results of our thematic work in areas such as equity release and payment protection insurance to design products that can more easily be sold and advised upon in accordance with our requirements. And we heard from one firm that its improved product design procedures had resulted in three unsatisfactory new products being dropped that would otherwise have reached the market.
We have seen more firms doing mystery shopping of their sales and advice processes, and using other techniques, to assess the fair treatment of their customers and to identify areas of customer concern. And we have seen firms providing customers with improved post-sale information so that customers can review their positions more easily.
On staff remuneration we have seen an increasing number of firms reducing the emphasis on commissions and sales targets in favour of including a larger element of remuneration based on core salary, on measures of customer satisfaction, and on internal reviews of the quality of the service provided by individual members of staff.
Staff training and internal communications are also containing an increasing element of Treating Customers Fairly. Some time ago now, I was pleased to see, while waiting for a meeting with a major banking and insurance 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 the front cover immensely gratifying, proving as it did not only that the group was trying to embed the treating customers fairly culture into its people, but also that it was possible to do this using exactly the same words that we have been using.
In the context of mortgage endowments we have seen improvements in complaints handling procedures. We have also seen more firms reviewing and analysing complaints in order to identify and to correct the “root causes”, and thus to change procedures so as to reduce the number of complaints received in the first place.
Because it encapsulates so much of the above, I was also particularly pleased to hear of one firm that has instigated a “walkthrough” of its customers’ detailed experiences – the customer journey through the entire product lifecycle for each product type and each distribution type – to identify actual and potential unfairness. This includes customer understanding of products, financial promotions and product literature.
Finally here, we announced last Friday the results of some thematic work on the standards of claims handling by general insurance firms dealing with retail customers. This was based on a sample of 34 firms, and covered buildings, contents, motor, travel, and loan and income protection products.
Overall, the results of this work were positive and encouraging. Service standards are generally in place and are mostly met; good progress is being made to share data and spread good practice in dealing with claims that may be fraudulent; and firms are reacting in response to problems arising from outsourced service providers.
We did, however, identify areas where some of the firms in the sample could improve their claims handling approaches. This included reviewing product disclosure documents and sales practices, since the most common reason to reject a claim is that the event is outside the cover provided. Firms could do more to address this up-front, by making it clearer to customers from the outset what is, and what is not, covered by the policy.
This reminded me of when 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 fallen to almost zero.
Further to go
But before you all fall into a rapturous state of self-satisfaction, I should also observe that these examples of good practice are by no means standard practice across the insurance sector and there is still a long way to go.
We recognise the scale of the challenge firms face in trying to embed the principle of Treating Customers Fairly within all that they do. But in some firms there is still no clear articulation from senior management of what Treating Customers Fairly means for the business; no allocation of responsibility within the firm for implementing any initiatives to meet the Treating Customers Fairly requirement; and no staff understanding of what the principle means in practice.
Some firms have not addressed their product design procedures, and clearly need further encouragement before they think about customer testing their product literature. Similarly, we have found firms where staff remuneration continues to be dominated by commissions and other volume-related incentives; and where no attempt is being made to collect any management information on whether customers are being treated fairly or not.
There can also be a disconnect between the good intentions of senior management and the behaviour of their customer-facing people. Even those firms who have made substantial progress in implementing Treating Customers Fairly within their business would be among the first to agree that it will take time to move from the implementation stage to the embedding of Treating Customers Fairly throughout all levels of the firm. It takes a long time to change the culture of a firm. So we and they should be cautious before we are tempted to declare victory too early.
For example, on a recent visit to a general insurance broker, and having clearly set out the rationale for the visit and explained the thematic work taking place around Treating Customers Fairly, we asked an adviser to start by telling us what Treating Customers Fairly meant to him. He replied "Well, I know what the "T" and the "C" stand for. That will be Training and Competence. But I don't know what the "F" stands for".
We also continue to find a worrying number of practical examples where customers are not treated fairly. For example, in the course of our work over the last year or so we have found: financial advisers giving poor quality advice to consumers on equity release products; a range of issues with both the content and provision of disclosure documentation; and poor selling practices and a lack of proper compliance controls among a sample of firms selling payment protection insurance.
Firms should also bear in mind that they can be complying with the letter of their legal obligations without necessarily conforming to the spirit of the principle of fairness.
A different aspect of "further to go" is that some firms are still questioning whether the obligation to treat customers fairly applies to them at all. We are clear that this requirement applies to all the firms that we regulate. But as with everything we do, the requirement is risk-based. So we expect firms to look at their businesses, the risks they face, and in particular those aspects of their activities which pose risks to the fair treatment of customers. It is the nature of the work required that will differ according to the firm.
For example, some general insurance providers and intermediaries have suggested that since the general insurance market is already efficient and effective because of the degree of price competition, the need for Treating Customers Fairly does not arise.
I agree that good practice should be easier to achieve for more straightforward and highly competitive products such as motor and household insurance. However, it is also clear that more complex product types such as critical illness and payment protection insurance pose a significant challenge to the fair treatment of customers.
As with other types of firm, general insurance firms need to consider those elements of the product life cycle that do apply to them, and to ensure that they have considered whether they are treating their customers fairly at all these stages. This should include looking at the way they handle claims and complaints, the approach they take to staff remuneration and other potential conflicts of interest, and ensuring that all disclosure documents are clear and accurate.
Nor does having no direct contact with retail customers remove entirely the need to consider Treating Customers Fairly. Some product providers claim that because they have no direct relationship with retail customers, they have no reason to consider whether they treat such customers fairly.
I disagree. Such firms stand at the beginning of a chain of actions that leads to a product being offered to consumers. As such, they can alter the outcome for the consumer, and they need to consider whether their products are properly designed, targeted and tested, and whether they are providing clear and accurate information to their distribution chain about the nature of their products and the risks associated with them. Financial advisers often tell me of their concerns about the quality of information given to them by the product providers they deal with. I sympathise with this view, albeit without in any way absolving these distributors of their own responsibilities. I would also expect product providers to have a commercial interest in monitoring whether the end result matches their intentions, for example by monitoring sales trends.
Indeed, many firms, including both general insurance intermediaries and product providers, having taken the opportunity to review their activities, have been surprised by the results of their gap analyses and have realised that they needed to make changes or improvements to ensure that they deliver fair treatment.
Next steps
For firms, and particularly for the senior management of firms, the next steps are to continue to focus on implementing Treating Customers Fairly within their businesses, and then to move beyond this to the point where fair treatment is fully embedded. We expect senior management to move to a position where they can satisfy themselves and demonstrate that fair treatment is being delivered on the ground and in the outcomes experienced by their customers.
Meanwhile, we recognise the challenges that our Treating Customers Fairly initiative – and a move towards a more principles-based approach more generally – pose for our own supervisory staff. We are working on ways to ensure 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 Consultative Group, to gain the benefit of their collective input. Firms need to know what they should expect from our staff and, in turn, will be better-placed to alert us if our staff do not perform accordingly.
In our supervision of firms, we will be continuing to check that firms really are putting consumers at the heart of their business, and we will be measuring the extent to which firms are embedding Treating Customers Fairly throughout their business, including through cultural and behavioural change where necessary. We will also continue to work on various clusters and difficult themes, such as product provider / distributor relationships.
Where we find that a firm is failing to treat its customers fairly, we consider the most suitable course of action. In many cases, we will agree with the firm a means of addressing shortfalls including, where necessary, providing redress to consumers. In some cases, failure to treat customers fairly may lead to enforcement action, in particular where a firm has not responded to indications of a problem, has failed to identify shortcomings and to develop a strategy to remedy them, and has committed a serious breach of the principle. But we do not expect to take enforcement action if we see that firms are making a genuine attempt to deliver on what Treating Customers Fairly means for them and there has not been significant risk to consumers.
There are many aspects of Treating Customers Fairly that I do not have time to cover today. For example, we have more to do to explain what exactly 'principles-based' regulation means in practice. I know that many of you have concerns about the status of the various pieces of industry 'guidance' and our own statements of good practice on Treating Customers Fairly. And there are also difficult questions on exactly where firms' responsibilities begin and end, and on exactly what we are assuming about the extent of consumer responsibilities when they engage with financial services providers. These are all important questions on which we continue to focus and make progress.
Conclusion
Treating Customers Fairly is a key part of our retail market strategy, through which we aim to deliver better outcomes for consumers.
Although considerable progress has been made, we have further to go before Treating Customers Fairly becomes fully embedded, by which I mean that customers recognise that they are being treated fairly, and firms can demonstrate clearly and convincingly that this is the stage that they have reached.
We therefore need to work together to turn the good practice that is already out there into standard practice across the whole insurance industry.