TCF and customer impact
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Speech by Nausicaa Delfas, Head of Department, Treating Customers Fairly, FSA
ABI Customer Impact initiative launch
14 March 2007
Thank you for inviting me to be here today. My remarks this morning will focus on:
- Our current programme of work under the Treating Customers Fairly initiative, or TCF as it has become known;
- How Customer Impact relates to the regulatory obligation to treat customers fairly; and
- Considering whether there might be scope to explore the benefits of extending the Customer Impact scheme beyond life, pensions and investments to the general insurance market.
Treating Customers Fairly
Helping retail customers achieve a fair deal is an overarching priority of the FSA. Our goal is to change the behaviour of firms towards their customers in the retail market place. Through our initiative on Treating Customers Fairly we have issued a challenge to senior management in firms to ensure that they treat their customers fairly throughout the business and at all stages of the product lifecycle.
In our paper ‘Treating customers fairly – towards fair outcomes for consumers’, published last July, we articulated the outcomes for consumers that we wanted to achieve through the Treating Customers Fairly initiative.
The first outcome that we are looking to deliver is that 'Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture'.
Treating Customers Fairly is a cultural issue and needs to be driven from the top. So we continue to look to senior management to lead the process and to ensure that high-level commitment to TCF translates to good outcomes for consumers 'at the coalface'. We have found that weaknesses in a firm's corporate culture can lead to poor quality outcomes for consumers. For example, firms with poor training and competence arrangements tend to offer poorer quality of advice. And if a firm relies heavily on rewards driven by sales-based commissions then this may – without adequate controls – lead to mis-selling. We are currently developing and piloting a framework to help us and firms to consider whether the various elements of a firm's corporate culture (including leadership, controls, internal communications, training and competence, and reward) are geared towards treating customers fairly. We are devising this in consultation with industry and consumer groups and we intend to identify examples of good and poor practice here and we will publish a statement in the summer.
Our next five outcomes all relate to different stages of the "product life-cycle".
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.
Products and services need to be designed with the intended market in mind and marketed appropriately. We have seen cases in the past of high risk investment products, which should have been designed for sophisticated customers with a high appetite for risk, being targeted at customers who had a low appetite for risk. For example, split capital investment trusts and precipice bonds. We expect firms to take action to ensure that products are designed for and targeted to the types of customers for whom they are appropriate.
How firms manage their relationships with other firms is a key issue here. In today’s retail marketplace, products can be sold through complex supply chains involving a number of firms, any one of which can have an impact on the end retail customer, whether they have a direct relationship with that customer or not. That is why we have been clarifying what we see as the respective responsibilities of providers and distributors in delivering the fair treatment of customers. We are currently considering responses to our Discussion Paper on this subject and will feedback in due course.
Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
Before and at the point of sale we expect all financial promotions and other information to be clear, fair and not misleading. In the area of financial promotions we have concerns where adverts do not reflect what a product really delivers and therefore raise inaccurate expectations with the consumer. Post sale disclosure can also be important to ensure that consumers are kept informed of product performance and of opportunities to act when circumstances change.
So it is interesting that in terms of the customer impact survey, clarity of information was the area which scored least well. That finding is entirely consistent with our regulatory work. Next month we will be publishing our work on post sale disclosure in the insurance market. I can give you a broad flavour of the conclusions of that work now. Whilst we found some good examples where firms communicated well with customers, there were too many cases where we had concerns with the material we reviewed. The main areas of concern related to the use of jargon, a lack of explanation of what things actually mean to the policyholder and an absence of clear or prominent explanations of some product features that are valuable to the policyholder. There is a role for all of us in ensuring that good practice on clarity of information is disseminated.
Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances.
We continue to find too many cases where customers are sold products that do not meet their needs.
Outcome 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 as they have been led to expect.
We want firms to be clear about what product or service is being provided and the range of possible results and experience for the consumer. Consumers can be fairly treated even if the product they purchase performs poorly, but there can be fairness issues where the consumer is misled about possible performance or is led to expect a different standard of service to what is received.
Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
Post-sale barriers can be cultural, contractual or competitive. The consumer ought to be able to switch providers without incurring excessive penalty. Similarly firms should not make it unnecessarily difficult for consumers to make claims or make a complaint.
Metrics – measuring progress
We are determined that industry sustains momentum with TCF and we are developing ways of measuring progress against our consumer outcomes. The Customer Impact Survey/ Scheme is a helpful input to our work in this area. We will share our conclusions with the industry in due course. This work will also determine what further work on TCF may be needed.
"Implementing" deadline
Separately, we are of course assessing the progress of firms with TCF against the deadline for implementation, which we set in July last year. The deadline expires at the end of this month. After that we will pull together our findings and report back our assessment of progress before the summer. Of course, if a firm meets the deadline it does not necessarily mean that it is treating its customers fairly. It may take some time before the full effects of a firm's efforts with TCF do translate into improved outcomes for all its customers.
Customer Impact Initiative
Moving on from our own work to the reason we are here today, we are very pleased at the constructive approach made by a number of trade bodies to help their members fulfil their obligation to treat their customers fairly. In this spirit we welcome the ABI's Customer Impact initiative. We hope that it will provide useful assistance to firms as they consider how to deliver on TCF. Clearly, the scheme is not an exact match with our TCF and other principles and as such does not provide a regulatory 'safe harbour'. But as we look at the details of the scheme we can see that its objectives are broadly complementary to our objectives for TCF.
For example:
- It aims to meet the customer's needs by putting the customer at the heart of the industry;
- It has as an objective to improve outcomes for customers of the UK life, pensions and investment industry; and
- Signing up to the customer commitments represents a pledge on the part of senior management to put the customer at the heart of the business. In so doing it should help to ensure that senior management are held accountable for the experience of the customer.
In particular I would like to highlight the customer commitments. We see the customer commitments as being broadly consistent with three of our intended outcomes for TCF.
For example, Commitment 1 deals with product design;
Commitment 2 deals with the need for clear information; and
Commitment 3 deals with issues which arise post-sale.
The commitments are said to last for the duration of the relationship between the firm and the customer, or as we would say for TCF, the product lifecycle.
Senior management
We very much welcome that the Scheme requires senior management to sign up publicly to the customer commitments. We have always maintained that it is their responsibility to ensure that they treat their customers fairly. By ensuring that senior management are responsible for annual reporting against the customer commitments, Customer Impact should strengthen the accountability of senior management and play a role in ensuring that senior management aspiration is matched in practice by the experience of the customer.
We continue to believe that the gap between senior management aspirations on TCF and delivery of fair outcomes at the coalface poses a real challenge. For example, in the course of our work on fairness in firms' corporate cultures we have found a number of examples where senior management appear to be fully endorsing TCF and trying to instil values which ought to be consistent with treating customers fairly but where the messages are being lost somewhere between board room and the branch or call centre. In some firms, there may be strong processes in place – for example on complaints handling – but we find that these are not consistently applied in practice. Or we see firms which have not considered whether their remuneration and reward packages support their aspirations on TCF. A big challenge is obtaining the necessary buy-in from middle management and from areas like human resources and training to ensure that the cultural change required for TCF gets carried throughout the entire organisation.
Fairness and satisfaction
Of course there is a key distinction between TCF and the customer impact survey. The latter has been established to measure how well companies serve their customers and is based on customer perception. Are customers necessarily the best judge of whether they have been fairly treated?
We have indicated to the ABI that we are not persuaded that the Customer Experience Index adequately captures a measure of fair treatment as opposed to customer satisfaction. We recognise that this is a difficult area but we think that it is essential that firms consider carefully how they can interpret the results from the Index and what, if any, inferences can be drawn from it about progress towards TCF.
We need to bear in mind the impact that low financial capability has on customers’ views of their treatment at the hands of firms. We are quite certain that there might be occasions when a customer may have received a Rolls Royce service from the firm, and might be very happy with it, but may have been sold a product which did not meet his needs. Conversely, there will be customers who might be very unhappy with the treatment they have received from a firm but have been treated entirely fairly.
Survey results in key areas
I know that you have heard from Stephen already on some of the other more detailed findings on the survey. I do not propose to go through these in detail, but the results pose some interesting questions. For example, the survey tells us that 85% of customers believe that their firms were easy to do business with and that they are treated fairly at the hands of that firm. However, only 53% said that they were satisfied with the service they were receiving at the hands of that same firm. Looking at some of the specific findings: 24% of customers thought that the effectiveness of post sale written communications in prompting them to take action were only fair or poor. Of those customers who had made a complaint in reporting period, 42% of these had problems with the product they had purchased and 50% thought that the way their complaint was handled was poor.
We find these results interesting because they mirror some of the areas where we have consistently had concerns about poor customer outcomes, for example product design, communications and complaints handling. I would suggest that we all need to know more about why there is a discrepancy between the overall customer perception and their experience in specific aspects of their dealings with firms and satisfy ourselves that the discrepancy is not caused by unfair behaviours on the part of the firm. We can also see that there might be value in looking at the results of the survey against similar surveys for other service sectors to explore what the findings tell us about the experiences of consumers of financial services as opposed to their experiences in other retail sectors and services, for example supermarkets, utilities companies etc.
Having said all this, in the year since the launch, Customer Impact has come a long way and it represents a solid base from which to move on. It is described as an “agenda for action” and this we welcome – just as our basis for TCF is to obtain better outcomes for consumers.
Independent panel
We are also pleased to see that the scheme is overseen by an independent panel with experience from outside the industry.
Good practice guides and codes
In the context of more principles-based regulation we recognise that there can be more than one way to achieve a given outcome and we do not want to be prescriptive towards firms - we want them to be able to determine for themselves how they will meet their obligations towards their customers. We believe that Codes of Practice and similar Statements generated by trade associations and professional bodies can play a role in helping their members understand and follow good practice in meeting regulatory requirements.
Our Discussion Paper published in late 2006 set out plans to encourage greater use of Industry Guidance in this context. And for TCF we have ourselves produced case studies and good practice examples to give firms food for thought as to how they will meet the requirements.
We have seen the production through the Customer Impact Initiative of 6 good practice guides as compatible with our move to a more principles-based approach to regulation. These have not been 'endorsed' by us, and indeed it was not the ABI's preference that we did so. But they may contribute to the sharing of good practice throughout the industry. We continue to discuss with the ABI the production of a guide which deals with product design and we look forward to the publication of further guides.
Supervisory approach
We are very pleased that so much of the life, pensions and investments industry has signed up to the scheme. Transparency and accountability are key, and it will be interesting to see how individual firms choose to publish their progress with the initiative. In terms of our supervisory work, we will take into account the firms' commitment to the customer promises and adherence to the good practice guides when we consider whether a firm treats its customers fairly. Our supervisors will be asking participant firms how they have fared against the published aggregate results; and what they are doing to address areas of weakness highlighted by the survey.
Overall there is much in Customer Impact which is complementary to TCF. With this in mind we would ask that the ABI gives active consideration to the idea of extending the scheme to cover general insurance.
Customer Impact for general insurance?
We believe that extending the scheme could bring benefits to customers of general insurance products. Whilst in some cases general insurance products may be simpler, this does not mean that firms do not need to consider how to deliver fair outcomes for consumers in practice. Again, one important message here is that price competition and customer satisfaction are not sufficient in themselves to achieve TCF. In general insurance, a customer may have been treated fairly when a claim is rejected, but they may not be satisfied. Equally a customer may be satisfied with a product they have been sold, but may not have been treated fairly by, for example, being a policy under which they are unable to claim.
In July last year we published a report on the key issues in this sector that needed to be addressed to ensure that customers are treated fairly. This highlighted three areas – product design; advertising; and product disclosure - all three of which fall directly within your commitment 1 - 'developing and promoting products and services that meet the needs of customers' and your commitment 2 – providing customers with clear information.'
On product design, for example, we 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. Our work in these areas has found that for some of these more complex products the distribution approach chosen by some firms may not allow for adequate explanation – particularly where customers may have unrealistic expectations about what a product will do or cover them for.
And then there are issues regarding financial promotions. We reviewed savings claims in press promotions recently and found that over half the savings claims in the motor sector were unclear or misleading; and similarly a quarter in the home insurance sector were unclear or misleading.
We continue to be concerned about the clarity and fairness of general insurance product disclosure. The omission of one or more significant or unusual exclusions or limitations is commonplace among policy summaries we review and firms failing to draw such matters to consumers' attention can hardly be said to have implemented or embedded TCF.
Clearly, there may be different issues to consider for general insurance providers and brokers. But overall we feel the extra scrutiny that would be brought to bear on general insurance products through inclusion in the scheme would be of great benefit to consumers.
Closing
In closing I would like to congratulate the ABI for introducing and continuing to invest in this initiative. Whilst it does not provide 'the answer' as to whether a firm is meeting the requirements of our principles, in particular the requirement to treat customers fairly, we see this as a very helpful initiative. We encourage the ABI to explore the scope for extending their work in this area to the general insurance market. And we encourage senior management in participating firms to use the findings to consider in key areas whether they are consistently delivering fair outcomes for their customers. I fully hope that the initiative goes from strength to strength over the coming years.