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Speech by Clive Briault, Managing Director, Retail Markets, FSA
TCF Conference Keynote Speech
7 November 2006

Good morning and welcome to this year's conference on the FSA's Treating Customers Fairly initiative.

Our Treating Customers Fairly work is a pioneering example of our general move towards more principles-based regulation. This means that:

• we are focusing on the outcomes we want to achieve, rather than on the prescription of detailed rules and formal guidance;
• we are focusing on the responsibility of senior management to meet the requirements set out in our principles and other high-level rules;
• we are giving firms the opportunity to meet these requirements in a more flexible, innovative and competitive manner; and
• we are focusing our own regulation - be it our policy-making, our firm-specific or thematic supervision, or where necessary disciplinary action - increasingly on principles rather than detailed rules.

I want today to:

• outline the consumer outcomes we are seeking to achieve and the key elements of the delivery mechanism in getting us there;
• outline how we see the role of senior management in ensuring that the Treating Customers Fairly principle is embedded throughout each individual firm; and
• offer some examples of how we and firms can measure the difference that Treating Customers Fairly is making to the consumers of financial products and services.

Our retail agenda

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
• proportionate, risk-based and more principles-based regulation.

Through our Treating Customers Fairly initiative, we want to achieve change in the behaviour of firms and thereby deliver improved outcomes for consumers.

Outcomes and the delivery mechanism

In our update, published in July, we set out six consumer outcomes that we want our Treating Customers Fairly initiative to achieve, namely:

1. Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture;
2. Products and services marketed and sold in the retail market are designed to meet the needs of identified groups of consumers and are targeted accordingly;
3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale;
4. Where consumers receive advice, the advice is suitable and takes account of their circumstances;
5. 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
6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

In addition to specifying outcomes, it is important to consider carefully how these can be delivered through a more principles-based approach. We believe that there are four key elements to the "delivery mechanism" here.

First, we are continuing to emphasise the responsibility of senior management of firms to deliver a significant change in the way that their firms treat their customers. I will set out in a moment some examples of what embedding this change means and what we have seen here.

Second, a more principles-based approach provides firms with greater flexibility to determine for themselves how best to run their business, and to decide for themselves how to deliver fair treatment to their customers in a way which is consistent with their commercial objectives. That is why we are consulting on a new Conduct of Business rulebook that is half the length and written much more clearly than the current version.

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 the FSA in various ways, including through our work on financial capability and disclosure; our supervision of firms in a more principles-based way; and, where necessary, our taking enforcement action against firms and their senior management when they fall below the standards we would expect of them.

We are making this move towards more principles-based regulation because we believe that this is the best way of making a real difference to consumers.

Progress

Last year, we reported that many firms were progressing with their own Treating Customers Fairly initiatives. This year, we are pleased to report further progress and that two thirds of the firms we sampled reported that they are in the "implementing" or "embedding" phase.

In general we have been pleased with the commitment shown by senior management to the Treating Customers Fairly initiative, and with their recognition that this is very much a responsibility of senior management, not something to be left to their compliance department. The challenge now is to ensure that the aspirations of senior management are more strongly demonstrated at the interface with customers.

Real cultural changes are emerging from this senior management commitment.

We see firms which have considered what Treating Customers Fairly means in the context of their corporate culture and values. We have seen examples where changes at the customer interface, such as empowering front-line staff to deal more easily with queries or complaints, have led to changes, even for how customers who do not complain are treated. Increasingly we are seeing senior management engaging directly with the experience of their customers, for example by listening to calls from call centres, sampling complaints, looking at reports from mystery shoppers of their firm, and participating in customer panels. And you tell us that within your own firms you are increasingly hearing your staff asking whether products, and the ways in which they are sold, really are consistent with treating customers fairly. We welcome these efforts to put yourselves in the place of your customers – "trading places" as I described it last year - since this captures the essence of what we are trying to achieve.

We see firms which have built the fair treatment of customers into the objectives and performance management for all staff, including senior management.

And we see firms which are taking a robust approach to the links between the fair treatment of customers and their own performance management processes. For example, some firms have managed out staff who have struggled with treating customers fairly, particularly where qualitative measures have replaced rewards linked to sales targets. This, of course, means that other firms may want to consider their recruitment processes, to ensure that such staff do not simply move around the industry, unwilling to adapt!

However, the findings from some of our thematic work - including on the quality of the advice process, and on specific areas such as equity release and payment protection insurance - and from some of our firm-specific supervision show that there is still some way to go before the fair treatment of customers is embedded across the industry.

Indeed, since July we have continued to report a mixed picture from our thematic work, including last month's update on payment protection insurance. Some firms are still failing to treat customers fairly and to supply them with all the information they need at the point of sale for these products.

We have taken disciplinary actions against some firms that have not treated their customers fairly. We have fined Loans.co.uk Limited and The Carphone Warehouse Ltd for failing to treat customers fairly in telephone sales of payment protection insurance and of general insurance respectively; we have fined Hoodless Brennan plc for failing to treat customers fairly and to pay enough attention to their interests and needs; and we have fined Royal Liver Assurance Ltd for selling with-profits policies to customers who had no need for life cover or for whom the life cover did not otherwise meet their needs. We have also taken disciplinary action against firms issuing unfair financial promotions; against advisers who failed to ensure that products sold to their customers were suitable; and against advisers who failed to ensure that their staff were adequately trained. We will continue to take action based on the Principles where we find significant shortcomings.

To maintain momentum, we set a challenge in July for all firms to reach the "implementing" phase in a substantial part of their business by the end of March 2007. Identifying those firms making progress too slowly, and bringing them to the stage we expect, will be central to our supervisory work.

We will also be looking more closely over the coming months at the quality of the work being done by firms, and engaging in outcome-focused conversations with firms and their senior management about their progress in treating customers fairly. This means that our supervisors will have to make judgements based on those conversations and on the outcomes they see at the firm; not just in systems and controls, but in matters of corporate culture, reward, training and so on.

We are engaged in a major effort to improve our own performance. We want firms to be comfortable that the move towards more principles-based regulation is embedded within the regulator and not confined to senior management aspiration or speeches. We have set out internally what this means for our staff and we are building this into how we recruit, retain and develop our staff.

Our supervisory process now contains specific opportunities for firms to feed back to us about the way in which our relationship with them is being managed. Analysis of the initial feedback shows that firms appreciate the way in which the dialogue with them is going – they believe their relationship with us is open and responsive on both sides and they have seen improvements in the degree of understanding shown by our staff of their business and of the issues they face.

There is an important dialogue to be held here between us and the industry. We have set out case studies and good and poor practice material for parts of the product lifecycle (such as product design, financial promotions, advice), to help firms work out the types of things they need to consider. We know that such material is useful – firms tell us so and we note that many who are relatively far-advanced in implementing their programmes have used it to "sense-check" their own changes.

We have built on feedback, including from the TCF Progress questionnaire sent earlier this year, where many of the firms sampled said that they wanted more information from the FSA, including on measurement and on the respective responsibilities of product providers and distributors for the fair treatment of consumers.

We recognise here the particular challenges our Treating Customers Fairly initiative and our move towards more principles-based regulation pose to smaller firms, which do not have dedicated compliance resources. This is why we produced the Self Assessment tool for smaller firms – a simple to use A4 sheet. We have also published on our website a number of statements of good practice (and some indications of less good practice) and case studies; and we are offering training courses, roadshows and surgeries specifically designed with smaller firms in mind. Equally, however, we do not want to overload any of you, particularly smaller firms, with information and so are mindful of the volume of new materials that we produce.

I want to mention briefly our recent Discussion Paper on the respective responsibilities of providers and distributors for the fair treatment of customers.

One of the challenges of more principles-based regulation is for us to strike the right balance between facilitating and helping firms to meet their responsibilities, and being overly prescriptive. When we were addressing the respective responsibilities of providers and distributors, we could have tackled the issue by drafting more detailed rules. But this would have meant developing rules to fit numerous scenarios and market structures. Instead, we approached the issue by making a statement about desirable outcomes, as a means of describing our interpretation of the minimum standards under the relevant Principles, without detailed instructions on how to achieve them. This is absolutely consistent with the delivery mechanism for more principles-based regulation.

We expect this material to act as a prompt for a more principles-based dialogue with the industry. At present, we encounter firms who over-interpret regulatory requirements – creating what they perceive to be regulatory costs where none exist. We all need to become comfortable with regulatory material that requires interpretation and the exercise of judgement.

Measurement

All of this activity needs to lead to real change, so we need to be confident that we are making progress. This brings me to the subject of measuring the success of our Treating Customers Fairly initiative – a significant challenge for us and for firms. How can we, and firms, demonstrate that this initiative is making a real difference to consumers?

Earlier this year, we surveyed a sample of firms and asked them about the management information they would use to demonstrate that they were meeting their responsibilities. We know that firms were also concerned about what we will be doing in this area and want more clarity on what we expect firms to do.

Articulating the consumer outcomes we want to see was the first step.

Having articulated the outcomes, how do we expect firms to measure progress towards them? Consider, for example, Outcome 2: "Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly".

Measuring progress towards this outcome requires pulling together a picture of what is going on in the areas of product (or service) design and the nature and target audience for financial promotions.

We have seen firms pull together quantitative and qualitative information on pre-and post- launch feedback from consumers, including their understanding of the product, service or literature; complaints which have design or promotion as a root cause; peer group comparisons; feedback from distributors; and sales made to target audience.

But this information set could also usefully include consideration of what indicators about sales can tell firms' senior management about whether their products are designed to meet the needs of their target audience. This could include, for example: cancellations; persistency; early repayments of products such as mortgages; customer queries, which might show the degree to which the product has been or can be better understood; and sales volumes and information on what types of customer these sales have been to. Firms might also consider quantitative or qualitative data which show how they are meeting relevant responsibilities to the distributor and/or the end customer, as outlined in our recent Discussion Paper.

We have also found examples where firms are looking outwards for information – mystery shopping not only themselves but also their competitors, and considering actively Ombudsman decisions or Enforcement cases taken against others to see whether they are running similar risks. Firms might also look at the undertakings received from other firms under Unfair Contract Terms regulations. For example, the undertakings received this year from firms and the agreement of trade associations to make the practice surrounding refunds of cancelled single premium PPI policies fairer and more transparent to customers – more than 300,000 policyholders were affected directly, but the impact could be wider still.

Some firms are going further and joining up the FSA-regulated and other parts of their business by considering the impact of decisions made by other regulators, such as the Office of Fair Trading and the Advertising Standards Authority.

For our part, we are developing a framework within which we will set out how we will measure progress towards each of the six consumer outcomes. We have said that we will use a range of data sources, including our day-to-day supervisory and thematic work; information from our work on complaints and financial promotions; our consumer research, including mystery shopping; our financial capability baseline survey; and industry data on sales, persistency and so on. These sources will provide both industry-wide and firm-specific measures.

For larger firms, we are putting together our own picture of their work on treating customers fairly, based on our firm-specific risk assessment and risk mitigation work; on what we learn about these firms from our thematic work where the firm was part of the sample; and on our work in areas such as financial promotions, the handling of mortgage endowment complaints and unfair contract terms.

Again using the example of Outcome 2, we will supplement this firm-specific information, and what firms tell us themselves, with the more general picture arising from our thematic work; from our consumer research and what it tells us about consumers' general experiences with the industry and whether the products they have purchased meet their needs; from the types of complaints reviewed and upheld by the Financial Ombudsman Service and so on. In this way, we can build a picture to tell us whether the actions of firms are delivering fairer outcomes for consumers.

This is all consistent with firms' senior management considering for themselves what the fair treatment of customers means for their firm and then being accountable for delivering it. But it also poses challenges, which apply equally to us and to firms.

First, given the amount of information available, and in the absence of a single definitive metric, it will be difficult to put a story together and to focus on what is really important. Many firms are operating a "balanced scorecard" or "dashboard" type approach. This allows them to bring together various types of information, qualitative as well as quantitative, to weight their indicators for relevance or confidence, and to form judgements about the "direction of travel".

Second, no matter how much data are collected, information can often be difficult to interpret. For example, is an increase in persistency due to better product design or the introduction of barriers to switching?

Third, the information collected needs to drive actions, not just tell a story. This could include the use of information on product design reviews to show how these have led to changes in – or even the withdrawal of – poor products and services. This is an example of the role of management information in "embedding", by evaluating whether the changes made are having the desired effect and influencing the outcome and, if not, helping to highlight further changes required.

But in spite of the positive examples we have seen, and the fact that we know this is difficult, we still see many examples where management information has not yet been considered, or where firms have not yet fully thought through how to analyse existing information to show how customers are treated. In the absence of sufficient management information, it will be difficult for firms to persuade us that they are delivering on their obligations under our Principles.

Management information in relation to Outcome 1: "Consumers can be confident that they are dealing with firms where fair treatment of the customer is central to the corporate culture" is less well-developed, although we have seen some good examples, such as firms increasingly putting themselves in their customers' shoes, looking at how their systems and processes have an impact on the customer experience, and then presenting their management information clearly against that customer journey. The first challenge here is to make the appropriate distinction between customer satisfaction and fairness: customers can be satisfied because they are unaware that they are unfairly treated, or fairly treated yet dissatisfied.

Firms are also not yet measuring the direct links between their core values, the behaviours exhibited by staff, and the consequent outcomes for consumers. For example, where changes have been made to reward policies so that staff are incentivised differently, does this mean that consumers received different recommendations as a result? We are conducting further work in this area, to look at issues such as reward, training and competence and corporate culture. We hope that this will facilitate debate in the industry on the cultural aspects of this initiative.

Conclusion

The Treating Customers Fairly initiative remains a key priority for us. We want to maintain and increase momentum to deliver the consumer outcomes through the firms we regulate, by regulating those firms in a more principles-based way. Together, we can make a real difference to the consumers of financial products and services.

We want firms and their senior management to drive through and to demonstrate achievement of the outcomes. There are still significant challenges to be overcome, not least in driving change to the front line of firms' business and then in measuring its impact on consumers. But the commitment and progress we have seen are promising signs that this can become a reality.