Treating Customers Fairly - latest FSA developments
Speech by Sarah Wilson, Director responsible for TCF, FSA
Complinet Conference
23 March 2006
I am delighted to be here today. Complinet has of course been amongst those most anxious to promote discussion on what the FSA’s Treating Customers Fairly initiative means for individual firms. We welcome this contribution – as we do that of a number of other parties (including the ABI, speaking here later today). As I will explain in more detail, this is an initiative which particularly warrants and benefits from widespread discussion and from the complementary initiatives of third parties.
It is now eight months since we published our latest publication on Treating Customers Fairly – itself sub-titled ‘building on progress’. It is therefore an excellent moment to take stock of recent progress, and to look forward to our next report in July. In what follows I plan to address some of the more difficult issues that we are encountering.
If I may I will start with two pieces of background.
First, I would like to emphasise the importance of Treating Customers Fairly. We aim through our regulation of the retail market place to improve its efficiency and effectiveness for consumers. In particular we aim to achieve four things:
- capable and confident consumers
- simple and understandable information for, and used by, consumers
- well-managed and adequately capitalised firms that treat their customers fairly
- risk-based and proportionate regulation
You will see that fair treatment of customers by firms is key to our strategic approach. Equally importantly, you will note that consumers have an important part to play – our financial capability strategy is designed to give consumers the tools they need to become more capable and confident; while information supplied direct to consumers by the regulator as well as by firms (for example our recent ‘money laid bare’ campaign) assists consumers in making informed choices.
Second, to emphasise that – while the FSA Principle for Business that requires firms to treat their customers fairly is not new – the purpose of the initiative in this area is to challenge firms to review the position and, where-ever necessary, to make a step-change in their approach. As a part of our own preparation for the launch of the initiative, we ourselves reflected on the position of the retail market and the need for such a change. We decided that, although existing regulation was in our view risk-based and proportionate, the scale of market problems suggested that it was clearly not achieving as much as we hoped. We therefore supplemented this with an initiative that stressed senior management’s responsibility to focus on the FSA’s high level principles and to use its judgement to establish how best to comply with these. Accordingly, our aim throughout has been to avoid precise definitions of ‘treating customers fairly’ for all situations but rather to challenge senior management to reflect on what it should mean in practice in their business. It is in this context that the contribution of third parties – specialists perhaps in particular sectors or issues – is of particular value.
(Of course, we do nevertheless recognise that firms have many questions. Our response to this has been to develop case studies and publications that rely on examples of good and bad practice seen at firms. More recently we have focused also on the particular information needs of smaller firms- publishing a self-assessment tool to help them consider what Treating Customers Fairly means in their context. In adopting this style, we are very conscious that the resulting material does not have the status of FSA guidance but nevertheless believe from feedback from firms that it is of value.)
We have found that a new focus on Treating Customers Fairly has caused us and firms to focus on two types of inter-connectedness within the retail marketplace. These are the product life-cycle and, where this happens across several separate firms (as is often the case), the proper responsibilities of those separate entities. I would like to talk about these in turn
The product life cycle involves, depending on the nature of a firm’s business, addressing the fair treatment of customers at any of four stages – product design, marketing and promotion, sales and advice, and after sale care (including complaints handling). Furthermore, as firms have adopted this model, the benefit of recognising the proper linkages between the stages of the resulting life cycle has become self-evident. It makes perfect sense for the marketers to sit down with the product designers to identify the target market for a product or to develop a new product fit for a particular group of consumers. It makes sense that those designing and marketing products should each take account of the information and training needs of those selling and advising. And there is considerable value in those dealing with customers after sale (whether through complaints or otherwise) sharing information gained if they are finding that a product is not meeting consumer expectations. Through our supervisory work – whether individual firm focused or thematic – we continue to explore how firms are responding to this challenge and will continue to share our findings with you.
For example, on product design, we believe that firms that treat customers fairly need to consider, test and review the impact of a new product on consumers before launch – including looking at how the product performs in adverse or unexpected market conditions. We have found good practice where firms had rigorous programmes of customer research as well as the provision of balanced and informative literature and training for intermediaries. And we heard from one firm that improved product design procedures had resulted in three new products being dropped that would formerly have reached the market.
In contrast, we have seen examples of inadequate information and training for staff and distributors – so potentially putting consumers at risk.
Similarly, on marketing and promotion, it is our view that material needs to reflect the characteristics of the product and be suitable for the audience to whom it is being communicated. Central to this is that the material must enable the customer to balance potential reward against risk.
For example, recent thematic work on financial promotions has looked at a range of advertisements for investments for children. During that work we saw promotions that described investment products as ‘savings plans’ and thus gave no indication to the reader that the product performance was linked to the stock market. Some promotions described capital-at-risk products as ‘safe’ or ‘secure’, and some others as ‘simple’, ‘tried and tested’ and ‘straightforward’ means of saving for children. We saw promotions that described how the products would provide ‘nest eggs’ or ‘wind falls’ for children. In each of these cases, there were no indications that these investments might return less to consumers than had initially been invested.
On sales and advice, we are currently carrying out work to look at the quality of advice in the sale of investment products – and in particular the extent to which advisers successfully consider the wider financial circumstances of the potential customer and their attitude to risk. These are crucial if consumers are to go away with products suited to their needs and therefore ones where the features and performance are less likely to give rise to unfulfilled expectations and/or complaints in future.
And finally on the product life cycle there is the question of after sale care. Here my example comes from the general insurance industry. Our recent thematic work on claims handling in this sector was reported last week. Overall, we were pleased to find many good examples of fair treatment of consumers. However, it was also notable that 56% of firms said that the most common reason for rejection of a claim was that it fell outside the scope of cover. This seemed to us to be considerable cause for thought. Of course claims outside the scope of policy could be indicative of attempted fraud and we support industry efforts to reduce the incidence of this. But they might also indicate that policy conditions are unnecessarily complex and difficult to understand, or that the product information is unclear, or the sales process poor. All reasons for senior management to want to examine their claims handling data and dig deeper to establish what it tells them about their business.
The product life-cycle offers a straightforward framework for considering the fair treatment of consumers when only one firm is involved in delivery to a consumer. However, this is relatively rare. In practice, several firms are often involved. And this brings me to my second type of inter-connectedness.
It seems to us that, while there are important legal and regulatory responsibilities at each stage across the chain, fundamentally in a retail market place that wishes to have a reputation for the fair treatment of customers, all those in the chain need to take account of the impact of their actions on the end customer. In other words, where we hear firms say that the Treating Customers Fairly initiative does not apply to them because they have no direct contact with a retail consumer, we strongly disagree.
The easy end of the spectrum is a firm that outsources a part of its operation. In this case, it remains wholly responsible for compliance with the Treating Consumers Fairly principle, and must build compliance with this into service level agreements and manage its commercial arrangements accordingly.
More complex, of course, are circumstances where a firm is involved as distributor etc who is separately accountable for compliance with the Principle. Even here though it seems to us that the asset manager that distributes wholly through separate intermediaries, for example, retains responsibility at least for product design and testing, and for appropriate marketing to and training of intermediaries. Their actions clearly affect the outcome for the end consumer. And for sound commercial reasons we would expect the asset manager to take an interest in finding out after the event whether the products had indeed been sold to the expected type of consumer.
We are currently working on a statement of what the Treating Customers Fairly principle might mean for product provider and distributor responsibilities. We expect to publish this, following informal discussion with a range of parties, this summer.
Firms then are being challenged to look afresh at what the Treating Customers Fairly principle means and to do so in part through reflecting on the inter-connectedness implied by the product life-cyle, and in part by that created across firms in the retail marketplace.
We are now assessing progress. Clearly many firms are making significant progress. They are doing so in a variety of ways and we see examples of very good practice. Unfortunately, others are still at the beginning and have a long way to go – to them there is a warning: you are increasingly being left behind by competitors who are finding commercial advantage in putting consumers at the heart of their business; you will also find that the FSA has less and less patience with inactivity and starts to consider greater use of enforcement action. This would particularly be the case where a firm has failed to identify shortcomings which lead to consumer detriment, has not developed a strategy to remedy them and has committed a serious breach of the principle, whether or not there has been a breach of a detailed rule.
However, even for those where progress is being made, the outcomes of our thematic work amongst other things suggests that much remains to be done. Thematic work showing poor compliance with disclosure rules, poor sales practices for some products etc at the very least suggests that senior management good intentions are not always being translated into an appropriate attitude on the ground. They may also suggest that more difficult work remains to be done – for example in the area of remuneration, where a firm’s approach might be at variance with what it professes itself keen to achieve.
In July last year, we suggested that firms might be categorised into four groups when assessing progress on Treating Customers Fairly – those that are simply aware of the initiative, those that have got as far as conducting a gap analysis to establish what areas might need to be tackled, those implementing change, and those embedding. It is good to see an increasing number of firms move across to the implementation stage. However, we take the view that very few can as yet be expected to be embedding and this will probably continue to be the case in July when we next report survey results.
Why is this?
First, embedding requires that the fair treatment of consumers is established throughout the business. Supervisors will be looking for evidence of this – not just in systems and controls but in business culture including training and remuneration.
Second, embedding is continuous. Firms should not view a step change in Treating Customers Fairly as a short-term project that can be completed and then put on one side. Instead, supervisors will look for evidence that it is built in to processes and strategy going forward.
Third, embedding should lead to noticeable change at industry level. Clearly the extent of change will vary between firms, but the need for change at industry level was acknowledged by the FSA when we launched the initiative, and we do not therefore expect to say that large numbers of firms are embedding before signs of that change are evident. This should for example start showing in improved levels of compliance with key consumer facing disclosure requirements.
To summarise, we expect fair treatment to be reflected in firm culture, we expect a focus on treating customers fairly to be viewed as continuous, and we expect to see behavioural change (which is noticeable and significant at industry level).
All this makes your management information rather important. We are currently doing further work to establish how firms are getting on with measuring their progress. Many firms have all sorts of consumer facing – and other - information which can helpfully be analysed. The crucial point however, in a market where there is a large gap of understanding between firm and customer, is that there is a big difference between consumer satisfaction and consumers that are treated fairly. Put bluntly, satisfied consumers may have been treated very unfairly (and, of course, the reverse may also be true). So while we quite understand that firms will collect and analyse data on consumer satisfaction, it is not going to be adequate for measuring progress against our initiative.
I wish to end where I began. We view improvements in the fair treatment of consumers in the retail market place to be fundamental to our work to improve the efficiency and effectiveness of that market for consumers. We think a step change is required at industry level. We are pleased to see much progress to date but there remains much to be done.
