Some wider aspects of fairness
Speech by Clive Briault, Managing Director, Retail Markets, FSA
FSA Treating Customers Fairly Conference
6 November 2007
Introduction
As already discussed this morning, there is a regulatory obligation on firms to treat their customers fairly. We are working in partnership with firms and other stakeholders to achieve this. Last year, 87% of the attendees at this conference said Treating Customers Fairly was in the interest of their firm. In this session, John Fingleton – who I am delighted to be sharing this platform with – and I want to explore with you some wider contexts of fairness.
In particular, rather than thinking about “what is fair?”, I want to consider “who determines fairness, and how do they do so?". This in turn provides firms with some potentially very powerful incentives, over and above regulation, to work out for themselves what fairness means in their business, and to demonstrate that they are delivering fair consumer outcomes.
The wider and changing social contexts around fairness can be attributed in part to the growth of the information economy. More information is readily available, and information can be exchanged more easily and more rapidly. In addition to our direct involvement with firms on Treating Customers Fairly, our financial capability programme seeks to reduce the information imbalance between firms and consumers. But there are other dialogues which are relevant, including those between:
- Consumers, with each other and with the media, consumer bodies and campaigning organisations;
- Firms and consumers, prompted in part by more capable and more discerning consumers;
- Regulators and consumers, through the increasing pressure for ever more transparent regulation; and
- Regulators.
Information exchange: Consumers
Increasingly, we see the impact of consumer actions prompted by the media; by campaigns run by organisations ranging from consumer bodies to claims management companies; and by consumers themselves. The most high-profile of these have recently included those relating to mortgage endowments; bank charges; Equitable Life; the Facebook campaign by students to persuade HSBC not to change overdraft conditions as soon as they graduate; and Northern Rock.
This means that firms’reputations can be damaged very quickly, affecting brand and shareholder value. And as we see further advances both in the ease by which information can be exchanged and in financial capability, what will happen then? We already know from our baseline survey of financial capability last year that “informal advice” from family and friends has a greater influence than materials printed by firms or regulators when consumers come to choose a product or a service, so increasingly consumers may judge Treating Customers Fairly for themselves.
Our own complaints data, and the data on complaints that are resolved by the Financial Ombudsman Service, reflect this trend of an increasing willingness and ability of consumers to take matters into their own hands. As the wave of mortgage endowment complaints recedes we have seen a sharp – six-fold - increase in complaints about bank charges, and we may be seeing the beginnings of something similar on payment protection insurance. Meanwhile, complaints to firms about poor customer service have increased significantly in the last year.
This is not to say that consumers are always responding to balanced coverage of these issues. Indeed, some of the media coverage of issues and other stimulus for action may be very partial. How many of us have been cold-called by claims management firms telling us that the average consumer is owed £1,900 by their bank and then to be offered - for a fee - a service that is available free of charge if a consumer contacts their bank and, if still not satisfied, takes their complaint to the Financial Ombudsman Service?
We can also learn from other sectors to illustrate the power of the consumer. Take for example the fast food companies. Gone are the days when the only choice available was between single or double burgers with regular or large fries. In recent years the growing concern about obesity levels and poor diet has led to companies diversifying their menus and offering healthier options – a direct response to changes in the cultural environment which affected the way customers perceived their brands.
Consumers can also make their views felt in a positive way, such as the example of Cadbury's who, following popular demand, re-introduced only last month the Wispa bar, which was launched in 1981 and withdrawn in 2003. I doubt, however, that we will see a populist campaign to reintroduce precipice bonds and split capital trusts.
There is a moral here for firms: act before you are engulfed by this rising tide.
Firms and consumers
It may also be observed that financial services firms are facing an uphill struggle because they operate in a context of consumer distrust. Research undertaken by Unisys at the beginning of June found that 71% of consumers do not trust their banks. And the Trust Index developed by the Financial Services Forum at Nottingham University found that banks are in the middle-rank in terms of trust across the industry, with brokers and advisers the most trusted, and credit card and life insurance companies the least trusted.
Trust in financial services will not increase by itself: it needs firms to act.
The NCC publication last year on “Regulation and Reputation” highlighted the damage the causes of this lack of trust bring to the brand, and also suggested that while only a small number of firms are wilfully non-compliant, these firms drag down the reputation of the wider industry. It is argued that consumers would have greater confidence in markets and could participate more effectively if they had access to information about business compliance. This would then reward the compliant businesses at the expense of the minority who taint the image of their industries.
We believe that through Treating Customers Fairly firms can have a more open and transparent relationship with their customers about how they can expect to be treated. To meet the 2008 deadlines we have set, firms need to be able to demonstrate positive outcomes. Firms which are confident they are treating customers fairly, and that they can demonstrate this, will increasingly compete on this basis. One building society has already begun a promotional campaign by posing fairness issues to consumers – in effect, telling consumers that they will treat them fairly, whereas others may not.
But those firms that are less confident also need to be open about it and about what their senior management will ensure is done differently. In its annual report for the ABI’s Customer Impact Scheme, the Customer Impact Panel argued that it is better for firms to be open about where they have fallen short, and the improvements they will make, when they are publishing information on how they have built such customer impact schemes into their business.
Our Treating Customers Fairly visits to firms have repeatedly shown that in areas where firms communicate effectively and clearly with their consumers, this has reduced their complaints levels. This is one example of where Treating Customers Fairly can improve efficiency as well as customer satisfaction and retention.
What should the regulator tell consumers?
In addition to firms being open with their customers, another increasing demand both by and on behalf of consumers is for greater transparency by public bodies about their judgements and decisions. And one aspect of this is a call for us as a regulator to reveal more about our view of the firms we regulate.
Five points are of particular importance here. First, we are already an open and transparent regulator. We publish a lot of information about our approach to regulation in our annual plan and budget, our annual report, our Financial Risk Outlook and our papers on risk-based and principles-based regulation. We consult widely and openly on policy issues. We publish reports on market practices – using anonymised examples of good and bad practices - that we have found through our firm-specific and thematic supervision, such as the report we are publishing today on the industry’s progress towards the six consumer outcomes that we have set out under our Treating Customers Fairly initiative. We publish the details of disciplinary actions we take against firms and individuals. And we publish consumer-facing materials such as factsheets and comparative tables about different types of product.
Second, we are constantly asked to disclose even more, in particular what we know and think about individual firms, not least where we might have concerns about how they treat their customers. Our Consumer Panel believes that we should name those firms which break our rules on financial promotions. They argue that debate in the public domain about compliance can be very effective and exert a very positive influence on business to improve standards. The National Consumer Council and Which? have also called on us to do more to name those firms who are in breach of our requirements. The NCC publication on 'Regulation and Reputation' argued that “businesses which breach their obligations to consumers do not deserve the protection of their reputations….we are convinced that good businesses should have little to fear from the greater presence of reputational information in the market place – and the benefits could be huge”.
Third, there is some information that we cannot reveal, because under the Financial Services and Markets Act we are barred from disclosing information we receive from or about individual firms when carrying out our functions under the Act, subject to some limited exceptions. In addition, if we do want to say publicly that firms have breached our requirements, there are "due process" provisions set out in the Act which we have to follow. These include a right of access to the independent Tribunal. We have gone further, and taken the view that it would be unfair to name firms and individuals that we are investigating until any resulting disciplinary action is taken; that it may be unfair to firms and potentially misleading to consumers to reveal partial judgements that may be based on relatively limited information; and that if we were to operate on the basis of complete transparency, firms might be less cooperative with us.
Fourth, because we see both the benefits of transparency and some risks around full transparency, we plan to publish a Discussion Paper early next year in which we will step back to consider the purpose and possible effects of greater transparency. We will look at the impact of transparency on the behaviour of both consumers and firms, and provide a basis for discussion on this important subject with all of our stakeholders. Similarly, the current review of the Financial Ombudsman Service by Lord Hunt is considering whether the Ombudsman Service is making the most effective use of the information and experience derived from its work for the benefit of industry, consumers and regulators.
Finally here, the Freedom of Information Act provides a further impetus towards more extensive transparency. The Act requires public authorities to disclose information requested of them: information can only be withheld if it is too expensive to provide or if an exemption applies. The Information Commissioner recently issued two important decision notices which directed us to name firms we had identified as using inappropriate charges when selling endowment mortgages; and with respect to thematic work we undertook on mortgage equity release, to name the firms we selected for mystery shopping, to name the seven firms that we investigated further, and to reveal the main findings in relation to each of those firms. These decisions have not challenged the restriction under the Financial Services and Markets Act on our disclosing the information we receive from or about individual firms.
The Information Commissioner judged that in these cases the public interest weighed in favour of disclosure. He said: “The implementation of information access rights will already have had the effect of negating the FSA’s ability to provide absolute assurances to companies that their names will not be published if they agree to resolve an issue via an informal agreement. In each case where a request is made for this type of information the FSA would need to justify why the information should not be disclosed, and where it is appropriate, provide sufficiently strong public interest arguments to justify withholding it. The FSA cannot therefore provide a company with any absolute assurances that a company can avoid having the FSA’s findings disclosed, as rights under the [Freedom of Information] Act may mean that the information needs to be disclosed if it is requested.”
We disagree with the Commissioner’s judgments and think that there are important points of principle here, which is why we have appealed against these decisions. We do not agree with where the Information Commissioner has drawn the line in terms of the public interest arguments. But it is not surprising that this line is being tested.
Cooperation among regulators
Stronger links between regulators can change the regulatory context and provide further incentives for firms to consider fairness in a way which looks at the entirety of the firm’s culture, as opposed to responding to detailed regulatory prescription, and to cure problems by considering their root cause.
The FSA and the OFT have a Joint Action Plan designed to deliver better regulatory outcomes. We have worked together on a number of issues, including better links between the registers for authorisation by both organisations; supervisory issues such as Payment Protection Insurance, Mortgage Exit Administration Fees and bank charges; policy issues such as guidance for dually regulated advertisements and input to the revised Banking Code; and collaboration on Enforcement. We also work together on matters of common interest relating to consumer education and capability.
Conclusion
All of this demonstrates why it is in firms’own interests to deliver Treating Customers Fairly through being fair, open and transparent, because it makes good business sense within the present and evolving social context. We will judge whether firms are treating their customers fairly, but we will not be the only ones doing so.