Treating customers fairly - Towards fair outcomes for consumers

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Speech by Sarah Wilson, Director, FSA
BBA Conference
19 July 2006

I am particularly delighted to be invited here today by the BBA to speak about Treating Customers Fairly or TCF. The BBA as many of you will be aware is an active member of the our TCF Consultative Group, which comprises representatives from a number of trade associations and consumer bodies, the Financial Ombudsman Service and the Financial Services Consumer and Practitioner Panels. The Group has proved to be a valuable forum for discussion of TCF issues and has fed usefully into the work I will be telling you about today and I thank the members for their input.

As I am speaking today we have published on our website new material on our Treating Customers Fairly initiative. I will explain more of the detail shortly, but I should like to start my remarks today with some of the high level conclusions that we have reached following a further year of work. In short:

there is mixed progress to report amongst firms – some are making good progress with implementing TCF strategies, and show a high level of senior management commitment, whereas others are lagging behind;
a majority of firms say that they are now implementing TCF programmes and we are much encouraged by this, but even in these cases we have found that high levels of senior management commitment to the fair treatment of customers are often not yet reaching the front-line;
for the minority of firms lagging behind in the TCF work, we are now setting a deadline – we expect all firms to have reached at least the implementing phase in a substantial part of their business by the end of March 2007.

The work underlying these conclusions is set out in some detail in material published today. In particular we are publishing:

A report entitled 'Treating Customers Fairly – Towards fair outcomes for consumers' setting out:
- an explanation of the outcomes for consumers that we are looking to achieve in the TCF initiative;
- the progress made by firms based on their own assessments and the findings of our own supervisory work; and
- those areas where further work is required and how we plan to take this forward.
Several discrete pieces of 'cluster' work identifying good and poor practice following our work on firms' management information, on the processes they put in place to maintain the quality of advice on retail investments, and on TCF issues arising in the mortgage and general insurance sectors.
There are also a number of additional cases studies to complement those we published in 2005. These are designed to reflect real scenarios and provide material which firms may find useful as background when considering how best to ensure that they treat their customers fairly.

In this context, my agenda today is

to set out the newly published consumer-focused outcomes for the TCF initiative
to provide a summary assessment of progress to date – drawing on firms’ own views and on our supervisory observations;
to set out next steps.

First, therefore I turn to outcomes.

As we are keen always to remind you, the requirement for firms to treat their customers fairly is not new and is firmly rooted in the FSA's Principles for Businesses. The sixth of these principles states that “a firm must pay due regard to the interests of its customers and treat them fairly”. TCF is not a new obligation - but we are giving it renewed emphasis to encourage firms to consider for themselves how they deliver fair treatment to their customers and, where necessary, to make changes.

We want to measure the success of TCF by looking at the actual difference it makes to consumers of retail financial services. To this end we are working towards achieving a number of outcomes for consumers – where we believe delivery requires changes, to varying degree, in the behaviour of firms. These outcomes reflect in part the product life-cycle which we have already encouraged firms to use in their TCF work. In particular, we want to reach a point where consumers:

are dealing with firms where the fair treatment of their customers is central to the corporate culture;
are marketed and sold products in the retail market that have been designed to meet the needs of identified consumer groups and are targeted accordingly;
are provided with clear information and are kept appropriately informed before, during and after the point of sale;
where receiving advice, the advice is suitable and takes account of their circumstances;
are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and also as they have been led to expect; and
do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

Of course, the product life-cycle does not always occur within a single firm and hence some of the outcomes will be of varying relevance – depending on a firm’s role in the creation or delivery of products to retail consumers. Indeed the proper responsibilities of providers and end-distributors in the retail market is a subject on which we are continuing to work, and we expect to say more on this in the autumn.

As I said, we believe that delivery of these consumer-focused outcomes will, to varying degree, require changes in the behaviour of firms. It is important to note in passing that consumers – and in particular improvements in their levels of financial knowledge and their behaviour – can also play a part in delivering the outcomes. Similarly, competitive markets can contribute to the fair treatment of consumers by delivering improvements in aspects of the products and services firms offer, for example by improving product design, quality of service or value for money. But neither consumers nor competition can deliver fairness alone.

Second, I should like to consider progress to date against these outcomes

As I will explain in a little more detail, we are currently able to assess progress in two quite distinct ways:

firms are able to tell us how far they have got with a process designed to deliver change, but have rarely yet put in place the management information necessary for them to measure whether they are making real changes on the ground;
by contrast, we have not yet done much assessment of the processes firms have put in place, but we have continued through our supervisory work to look at outcomes for consumers.

While each view is partial, the two types of information combine to provide a picture of progress to date.

Starting with firms’ own assessment of progress in introducing change. During the past year we repeated a survey we had conducted in 2005 (this time with 143 firms) to establish where in our TCF implementation cycle the firms themselves thought they were. As many of you will already be aware, the four phases of the cycle are: Awareness; Strategy and Planning; Implementing; and Embedding.

Our general impression is that there has been mixed progress.

80% of large firms/groups and 51% of medium-sized firms surveyed considered themselves to be at the implementing or embedding phase. And indeed through our supervision of firms in the financial services sector, including banks, we have seen many encouraging and positive examples of real progress towards firms implementing a TCF programme including senior management engagement and willingness to lead change. As last year, the largest retail financial services firms are reporting that they are making the most progress. We are encouraged by these findings overall.

At the other end of the scale, there are still a minority of firms that either deny that TCF applies to them or who have been slow to introduce a review of existing practices and consider properly whether change is necessary. There may of course be firms that look at their approach and identify that they do not have gaps or issues to address. However, our experience is that many firms find cultural or process issues that inhibit their ability to treat customers fairly. We therefore generally expect firms will find that there are changes to make.

In order to encourage the minority of firms that are lagging behind to move more quickly we are today setting a deadline – we expect all firms to be implementing TCF in a substantive part of their business no later than March 2007.

I mentioned that firms have generally yet to introduce the management information necessary for them to measure the impact of their behaviour on consumers. This is key – a firm will be unable to persuade us that it is embedding TCF before it has and uses such information. The fact that firms are introducing management information changes relatively late in their TCF work is illustrative of the challenge this area presents. In particular, many firms find it difficult to distinguish between customer satisfaction and fair treatment of customers. Given low levels of financial capability, it is unlikely that consumer satisfaction and fair treatment will be synonymous. A customer can be entirely satisfied, for example, with an unsuitable product. Equally, they can be dissatisfied with a fairly adjudicated general insurance claim. Our survey work on MI conducted in the past six months showed some progress but we also note that there is more to do. You can find more detail on our findings on our website.

Moving from firms’ view of progress on process to FSA’s assessment of progress on outcomes, we have considered what our supervisory work in the past year is telling us – in terms of the treatment of consumers across a wide range of products. Here the results of our thematic and other work imply that there is some way to go before senior management commitment and the work invested in the TCF initiative overall reaches the front-line and translates into significant improvements for consumers. This is not necessarily a surprise – cultural change takes time to drive through large or complex organisations. But it is important now that senior management redoubles its efforts to ensure that real change is delivered to consumers.

In terms of the individual outcomes, we are only at this stage able to provide preliminary views on progress, and plan in future to put in place a more systematic data-set to assess the position. However, taking all our supervisory work for the past year together, I’d like to make a few high level observations on progress against each. (The material published today provides a more detailed analysis.)

First, on firm culture:

Based on what firms tell us, we believe that some firms are starting to move toward developing a culture where TCF is central and which is championed by senior management.
Over the last year we have also seen some encouraging examples in our thematic work which suggest that firms – particularly larger firms – have put mechanisms in place to address issues identified. In some cases this has resulted in our follow-up work on these subjects showing evidence of improved consumer outcomes. For example, our latest round of work on mortgage disclosure documentation showed improvements, particularly among the large mortgage lenders; and we have also seen gradual improvement in standards of financial promotions.
However, we have seen a mixed picture from our thematic and other work suggesting that the extent to which TCF is already embedded within all relevant aspects of firms' corporate culture - for example, training and competence, remuneration and systems and controls - varies greatly between firms. For example, in our quality of investment advice cluster, we found that those firms with poor training and competence arrangements tended to have poorer advice processes – for example weaker factfinds - and therefore to be more exposed to the risk of mis-selling. We have also seen examples where firms' remuneration arrangements do not appear to contribute to the delivery of good TCF outcomes for consumers. And in our work on Unfair Terms in Consumer Contracts we have seen many examples of significant deficiencies in firms' standard form consumer contracts - we see this as an example of how the general TCF agenda has failed to take hold in a specific area.

Second, on product design and targeting:

In general, we have not focused significant resources in the last year on this area. We have previously published case study material and suggested good practice on this topic, and we may do further work on this to test how far the good practice is being met. The quality of material which product providers give to distributors can play an important role in meeting this outcome.

Third, on clear information:

The message from successive pieces of thematic work suggests that many firms need to communicate better. In our work across a range of sectors and sizes of firms we have found that standards in this area are disappointing, with successive pieces of our work showing high failure rates for both the provision of disclosure documentation and the adequacy of the content. For example, our work on standards of disclosure following the depolarisation changes found that in most cases financial advisers sampled were not complying with our rules on investment disclosure - advisers gave out both the Initial Disclosure Document and the Menu to customers at the right time in only 42% of cases; 65% of documents reviewed contained errors, many of which were in key sections. Similarly, our work on general insurance disclosure found that 62% of Initial Disclosure Documents reviewed did not comply fully with our requirements and there were a range of issues with both policy summaries and Key Facts documents: poor quality of style and presentation; missing information; and significant and unusual exclusions either omitted or not given due prominence.

Here also, however, it is important to point out the encouraging signs - including efforts from firms to respond to our findings and improved results from our most recent thematic work.

For example, our general view on financial promotions is that our decision to focus significant resources on monitoring firms’ advertising and acting on issues identified has produced results. In the general insurance sector, our critical illness insurance work found encouraging steps taken by firms to assist in the fair treatment of customers, for example by making policy documents and application forms for this complex product clearer. And, while we are concerned about post sale communication in some areas, we have seen some improvements in information provision after sale in relation to mortgage endowments.

Fourth, on suitable advice:

Quality of advice standards vary between firms. We have seen many good examples. However we have also seen TCF failings, in particular failure to obtain significant information to test suitability of products, and failure adequately to explain risks or the implications of a particular course of action. In some cases failures in the advice-giving process can lead to mis-selling and actual consumer detriment.

A summary of our findings from the TCF cluster on the quality of investment advice processes is published today. The cluster looked at the systems and advice generating processes in place in firms providing advice on mainstream investment products. The objective was to help firms improve their advice processes and reduce the risk of mis-selling. The findings are most relevant to firms operating in the retail investment advisory market, but the work also looked at small numbers of product provider firms with direct sales forces and retail banks offering investment advice. The full cluster report, which includes examples of good and poor practice as well as a factsheet and two case studies, is available on our website. Our work found many examples of good TCF practice but there remain an unacceptable number of firms that fail to take the steps necessary to reduce the risk of mis-selling, both in terms of the detailed rules and the wider principles

Fifth, on product performance and service:

We continue to see examples where firms have failed to communicate effectively with their customers about the characteristics of the products they are buying. This has resulted in examples of mis-selling and mis-buying, including PPI, structured capital at risk products (SCARPS) and lifetime mortgages. Overall we believe that firms still need to make progress on delivering clear communication, and therefore managing their customers' expectations about the products and/or service they are buying.

Sixth and finally, on post sale barriers:

We have seen some improvements in this area. For example our claims handling work with general insurance firms was encouraging. We have also found that many firms have identified that good complaints handling can be a critical element of delivering on TCF. Our thematic work on mortgage endowments looked at the quality and speed of complaints handling in large firms. We collected data to enable us to focus on weaker performers. This has resulted in a marked improvement in the volume of complaints being dealt with in a timely way. We have also seen improvements in the quality of complaints handling in many firms.

Overall therefore there is currently a contrast between the progress made by a majority of firms in reviewing existing practices and introducing change, and the outcomes actually seen by retail consumers. We expect in the coming year to see widespread changes in outcomes as well as process – whether measured through a firm’s MI or evidenced through our continuing supervision work. We believe that this will require sustained effort and leadership from senior management.

Before concluding, a few words on next steps. For our part, we will continue to treat TCF as a priority and to work to embed TCF within all aspects of our regulatory and supervisory approach. This will include aligning all relevant thematic work with our TCF priorities and drawing out messages from the findings of our thematic and firm-specific work on progress with TCF.
We will provide support, for example through training and targeted communications, to continue to help firms implement TCF and invest further in our own internal systems and training to help ensure that our supervisors have the tools they need to help facilitate firms' efforts to implement TCF.

We will continue discussions with trade associations, including the BBA, about their own role in assisting the delivery of TCF and more principles-based regulation as a whole – recognising the wide variety of ways in which they are currently facilitating the spread of good practice.

We will take forward work to review firms’ own assessments of progress with their TCF initiatives, and we will carry out targeted work on those aspects of the consumer outcomes where we are less well-informed, notably on product design; and on the cultural questions around how firms translate good intentions into delivery in the form of improved outcomes for consumers.

We will continue to consider enforcement action in circumstances where a firm's systems or actions leave open the potential for significant consumer detriment, or where actual significant detriment has occurred. This is much more likely to be our response where firms continue to deny that TCF has any relevance for them or have failed to take appropriate steps to work out what changes may be required and to start implementing them. This may include taking action against individuals within the firm if we consider that senior management have failed in their responsibilities.

In conclusion, I should like to emphasise three messages:

In many firms, considerable senior management commitment and careful work is going into reviewing business and making changes – we are encouraged by this, but the key now is to turn all this work into real changes for consumers;
In particular, firms that embed TCF will recognise that it is a continuous process – sustained change will not come about as a result of a one-off exercise but rather through cultural change.
For firms failing to make satisfactory progress, we now have a deadline – we expect implementation to be happening in a substantive part of all businesses no later than March 2007.

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