Treating Customers Fairly and more principles-based regulation
Treating Customers Fairly and more principles-based regulation
Extract from speech given at the FSA Summer School, St John's College Cambridge
Clive Briault, Managing Director, Retail Markets, Financial Services Authority
24 July 2006
We published last week our latest progress report on Treating Customers Fairly. This provided an update on the progress firms are making with delivering outcomes for consumers, based on firms' own assessment of their progress and the findings of our firm-specific and thematic work. And it outlined areas where further work is required and how we expect firms to take this initiative forward.
I want to focus today on how our Treating Customers Fairly initiative fits within our more principles-based approach to regulation. And I want to address some of the concerns raised by our stakeholders, both firms and consumers, in particular regarding:
- What we are trying to achieve for consumers?
- How do we intend to achieve it?
- How will we know when we have achieved it?
- How can we provide sufficient predictability to firms?
- How will we use our enforcement powers in a more principles-based regulatory regime?
Outcomes
By far the most important reason for adopting a more principles-based approach to regulation is to achieve a better outcome for consumers, investors and markets. So, for example, the purpose of our Treating Customers Fairly initiative is to ensure that firms treat their customers fairly in all parts of their business.
In the progress report we published last week, we set out six consumer outcomes that we want our Treating Customers Fairly initiative to deliver, namely:
- Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture;
- Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly;
- Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale;
- Where consumers receive advice, the advice is suitable and takes account of their circumstances;
- Consumers 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
- Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
Delivering outcomes
In addition to specifying outcomes it is also important to consider carefully how these can be delivered through a more principles-based approach. What is the "delivery mechanism" here? There are four key elements of this.
First, we are emphasising the responsibility of the senior management of firms to deliver a significant change in the way that their firms treat their customers. It is encouraging that senior management recognise this and tell us that meeting our Principles and other high level rules is a responsibility for them, not just something for their compliance departments to deliver. The senior management of most firms are committed to making this change, and to embed it within the culture and behaviour of their firms.
Second, a more principles-based approach should provide firms with greater flexibility to decide for themselves how best to run their businesses, while meeting our regulatory objectives. Firms should be well placed to judge the detail of how best to deliver those outcomes in the marketplace, and thus for example to deliver fair treatment to their customers in a way which is consistent with their commercial objectives.
Third, providing flexibility rather than prescribing detailed processes should enable firms to compete and innovate more effectively in product design, in the quality of customer service, and in providing value for money.
Fourth, this delivery mechanism can be reinforced by us in various ways, including through:
- improved financial capability and the provision of clear information by firms and by us to consumers, to help consumers to pursue their own best interests by playing an active and informed role in the markets for financial products and services;
- our supervision of firms in a more principles-based way, focusing on the responsibilities of the senior management of firms to meet the Principles; and
- where necessary, our taking enforcement action against firms and their senior management when they fall below the standards we would expect of them, as set out in our Principles and high-level rules.
Consumers should benefit from this through the delivery to them of the six outcomes outlined above.
Measurement
How will we know when we have reached a position where consumers can trust that they are being fairly dealt with by firms? Part of the answer will come from our own analysis of retail financial markets as gained through our firm-specific supervision, our thematic work including mystery shopping, and our own surveys of consumers and of consumer outcomes. But we also want firms to make greater progress in developing their own management information so that they can demonstrate to themselves and others that they are treating their customers fairly.
In terms of timescale, we have set a deadline of March 2007 by which firms should be implementing Treating Customers Fairly in a substantial part of their business, and where firms are already doing this we have encouraged them to keep up the momentum. We will continue to take stock of progress on a regular basis and may set further deadlines in due course.
Predictability
As part of our move to a more principles-based approach we are looking to remove a significant volume of our detailed rules. For example, we intend to implement a radical simplification of our investment Conduct of Business rules, our rules on financial promotions and our rules on complaints handling. And we have already removed our detailed rules on money laundering, and on training and competence for wholesale business, and are dismantling our Authorisation Manual.
Meanwhile, we are keen not to reach for our rule-writing pen in order to interpret and illustrate our high level requirements where we do not currently have detailed rules. We recognise the need to provide a degree of predictability to firms, some of whom ask us to define the minimum standards we require. Our response is that the Principles and other high level rules are themselves minimum standards, and that we see these minimum standards primarily in terms of outcomes, not of prescribing detailed inputs and processes.
Of course, in some areas we will continue to rely on detailed rules. Some will be necessary to address problems such as how to ensure that consumers receive clear, simple and understandable information from firms about products and services. And many detailed rules will remain because we have to implement EU Directives which are heavily prescriptive rather than principles-based.
But where possible we would prefer to provide predictability under our Principles and other high-level rules through various forms of guidance to firms, in particular through statements of good and poor practice and through case studies illustrating ways in which firms have successfully met our requirements.
We see these statements of good and poor practice as a means of helping the senior management of firms to think for themselves about how best to meet our high level requirements within the specific circumstances of their own activities and business model. And, by publishing examples of good and poor practice on either side of an acceptable standard, we are able to indicate to firms both where the minimum standards lie and that there are alternative ways of delivering them. We also recognise that where we identify very good practice that goes well beyond meeting minimum standards then we should consider whether there might be some way of indicating this. And we recognise that we should respect the confidentiality of "proprietorial" good practice that firms have developed to give themselves a competitive advantage.
We are also looking to make even greater use of industry codes and guidelines, and are revisiting how far we can accept that a firm following such codes and guidelines meets our minimum standards in that area. There are significant challenges to making greater use of industry solutions, and we do not intend simply to replace FSA rules with codes and guidance issued by trade bodies, or to proceed without input from consumers and other interested parties. However, we do see appropriately formulated industry codes and guidance as a means to help firms understand how to comply with our high level rules, and we want to make progress here.
We also accept that as all of this material proliferates we need to do more to bring it together in a consistent and coherent manner so that our interpretation of the minimum standards implied by our Principles and other high level rules is clear to all. This material needs to be readily accessible, so that the flexibility we want to achieve with a more principles-based approach is not at the expense of confusion or a lack of clarity.
For us as supervisors, a more principles-based approach means making informed judgements based on a good understanding of firms, their customers, and of the markets in which they operate. In forming these judgements about outcomes, and about what constitutes minimum standards, it means seeking a broad degree of consistency in terms of the outcomes that firms deliver rather than consistency in detailed requirements about processes, since in a more principles-based approach firms should be able to adopt different approaches to delivering outcomes that meet our high level regulatory objectives. We recognise the demands that making these judgements will place on our people and we fully intend to recruit and develop the people we require to meet these demands.
Enforcement
Finally, what does a more principles-based approach mean for enforcement? Three points are worth emphasising here. First, our Principles are rules. We can take enforcement action on the basis of them; we have already done so; and we intend increasingly to do so where it is appropriate to do so.
Second, we recognise that there is a legitimate concern that for a firm to be judged as having breached a Principle or other high level requirement then, as with any of our rules, it must be possible to predict, at the time of the action concerned, whether or not it would be a breach. Where the requirement of predictability is met it is legitimate for consequences to follow a breach even where the rule is expressed in general terms.
Third, we are not looking to take more enforcement actions for their own sake, and we are absolutely not looking to catch firms out by finding some aspect of their behaviour that falls slightly short of meeting all of our requirements at all times. For example, 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 or actual detriment to consumers.
