Treating customers fairly - an assessment of industry's performance against the consumer outcomes
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Speech by Sarah Wilson, Director for Treating Customers Fairly, FSA
FSA Treating Customers Fairly Conference
6 November 2007
Introduction
Good morning and welcome to our third conference on Treating Customers Fairly. I am delighted to see so many of you here and I hope that you will all find the conference thought-provoking, challenging and useful.
Today we publish our latest assessment of how the industry is performing against the six TCF consumer outcomes. As I will explain in a moment in more detail, while your commitment clearly remains high, it is evident to us that the pace of progress against the six outcomes needs to increase. It is my over-riding objective today to encourage a renewed sense of energy and drive – to stress the collective and firm-specific benefits of a successful outcome to the TCF initiative. Without such energy, it seems to us there is a real risk that many firms will miss the final deadline in December 2008.
But with drive and commitment – most notably from those at the top of organisations – it is entirely possible that the retail market can achieve a major break-through in its treatment of consumers. This would have tremendous reputational benefits – over time, consumers would regain lost confidence, and markets for well-designed and targeted products could be expected to grow.
Work to date
So, having given you my punch-line up front, let me go back to the beginning and, in doing so, provide some of the detail.
As you know, Treating Customers Fairly is an existing regulatory requirement, and moving the market to achieve this standard has been a regulatory priority for a number of years. Indeed, together with our work on financial capability it forms the centrepiece of our retail strategy.
Our work on Treating Customers Fairly has been determinedly principles-based. We have recognised throughout that there was value in giving space to senior management to think afresh and in a new framework about what they needed to do for consumers – space in terms of allowing them to develop their own best ways of achieving the outcomes we want, and space in terms of the time needed to deliver cultural change within (often complex) organisations.
We have therefore specified outcomes – six, and I will come to these later. In collaboration with firms (and our Consultative Group), we have also devised two frameworks to assist senior management. The first was the product life-cycle which has in many firms promoted a more connected view of the firm and its interactions with consumers than hitherto. We completed this earlier this year by publishing guidance (following consultation) on the responsibilities of producers and distributors to assist firms in considering circumstances where the product life-cycle occurs across legal entities.
The second framework relates to culture – and is designed to assist senior management to identify the obstacles that explain why – all too often – their good intentions are still not translating into change at the coalface in their interactions with consumers.
Collaborative work has also resulted in illustrations of what we would like to see - through case studies, through examples of good and bad practice, and through individual initiatives by trade associations. And we have an extensive programme of thematic work that has drawn attention to areas where remedial action is required by firms in order to treat customers fairly.
In short, we have given you as much space, and as much explanation and illustration as you could possibly need. It is now time for senior management commitment in firms to be translated into action for consumers – we recognise that what needs to be done varies considerably between firms and we are keen to maintain dialogue; but you need to deliver.
And, as you are well aware, there are now fourteen months left – by December next year, we expect all firms to be able to demonstrate, using as wide a range of quantitative and qualitative evidence as is appropriate, that they are consistently treating their customers fairly. After that date, it should simply not be the case that thematic work records small minorities of firms complying with the Principles (as for example happened on Key Features Documents recently). Nor should we be able to find products, such as was evident in our latest review of PPI, where senior management allow cultures to persist that make unfair treatment of consumers resistant to change. Conversely, firms that do treat customers fairly should feel themselves to be a part of an industry where the reputation for such standards is growing.
It seems to us very clear that the benefits of such a change will be very great. The deadlines provide firms with an opportunity to achieve real cultural change and a major shift in consumer outcomes – benefiting consumers and the industry. But there is a regulatory imperative too. For those firms that rise to the challenge, where senior management do drive change with great energy in the next fourteen months, there will be a regulatory dividend – supervisors have little reason to ask further detailed questions if you produce and use well constructed measures of your performance and they show a strong story.
But for those firms that miss the deadline and fail to take their obligations seriously, our message is absolutely clear – you will face more regulatory intervention. As you know we already act where we see significant potential or actual consumer detriment, and we will increase the focus and intensity of our supervisory work – increasingly requiring the use of skilled persons; imposing demanding risk mitigation plans with challenging deadlines; and remediation work. And, of course, we do and will continue to make use of enforcement.
Key Findings
So let me turn then in more detail to what there is to do.
Outcome One – can consumers yet be confident that they are dealing with firms where TCF is central to the corporate culture?
We have found that increasingly, large and medium-sized firms are able to understand and articulate what treating customers fairly means for their business. And, although smaller firms tend to be less engaged with TCF, once engaged, they are able to implement fair treatment of consumers throughout their business more quickly.
However, senior management commitment does not necessarily lead to cultural change. And we have not yet seen much success by senior management in delivering fair consumer outcomes throughout their organisations. Indeed, in terms of the firms reviewed when we created the culture framework, we found more poor practice than good practice. So I urge you to use that framework – with its focus on leadership, strategy, decision- making, controls, recruitment, training and competence, and reward – to challenge yourselves on the difficult changes that might still need to be made within your organisations.
Outcome Two – are products and services designed to meet the needs of identified consumer groups and targeted accordingly?
We have seen an improvement in product design processes. For instance, we are seeing some firms using more qualitative research to identify target markets and they are also tightening sign-off procedures between marketing and technical teams. We are also encouraged that firms are using the TCF process to improve their expertise in understanding the risks involved in developing new products or products for new markets.
But we have found that more work is required by firms – to identify target markets, stress-test products, and introduce adequate systems and controls. And we are concerned about the tendency in some areas for product design to be driven by the benchmarking of competitors' products rather than by identifying the needs of the target market.
Outcome Three – are consumers provided with clear information and kept appropriately informed before, during and after the point of sale?
There is a lot more to do before this could generally be said to be true. In fact, we continue to see examples of poor quality information. We have seen progress in financial promotions and in mortgage and general insurance disclosure. However, we are disappointed to identify weaker areas such as Key Features Documents for investment products (as already mentioned) and post-sale communications on life insurance products. All sectors still need to consider what more needs to be done to ensure information is clear and fair.
Outcome Four – where consumers receive advice, is it suitable and does it take account of their circumstances?
We have found common weaknesses in firms' processes around the giving of advice, which increases the risk of mis-selling. We have also seen some products where unsuitable advice was clearly given. Again, we think management needs to consider what they really know about the quality of advice given and satisfy themselves that it is suitable. (It is important to note that through the Retail Distribution Review, the industry is also working with us to move the market to a more sustainable model for the delivery of suitable advice.)
Outcome Five - are consumers provided with products that perform as firms have led them to expect, and is the associated service both of an acceptable standard and as they have been led to expect?
In very broad terms, financial products and services generally function as expected – those buying a pension receive an income in retirement; those acquiring mortgages find that they are able to purchase a home. But our report has identified a number of areas where false consumer expectations may be created. These include: expected rates of return, risk associated with particular products, ongoing review of customer needs, and standards of service. In a world where there is more to do on the quality of information and where there are risks about the quality of advice, it seems to us that firms run the risk of creating false expectations and there is more to do to limit this. (Of course we entirely accept that consumers may – despite the best explanations – have inappropriate expectations. Where that happens, the industry is not at fault.)
Outcome Six - are unreasonable post-sale barriers imposed by firms when consumers want to change product, switch provider, submit a claim or make a complaint?
We found that in parts of industry there are fairly high levels of switching activity between products/services. However, high levels of switching alone do not mean there are no barriers – and we were from the available evidence unable to draw a general conclusion about the existence or otherwise of unreasonable barriers.
On claims handling, our thematic results were broadly positive. There is however mixed evidence on complaints handling.
Management Information
It is clear from our assessment that many firms need to make significant improvements if they are to meet the December 2008 deadline of demonstrating to themselves and to us that they are consistently treating customers fairly. We set the March 2008 deadline - for firms to have appropriate management information in place to test whether they are treating their customers fairly – to help firms meet the December target.
There are of course two benefits in developing management information. First, measuring performance is a necessary precursor to managing it. And can I stress here that, by management information, we mean allsorts of quantitative and qualitative information of varying frequency designed to enable management to understand whether the firm is treating customers fairly. So you should not limit yourselves to the sort of material that traditionally appears in a Board data-pack – equally much of the extra material may well be readily available within the firm already.
The second benefit of developing good management information is cultural. I don’t need to tell you that staff behaviour reflects the issues that are monitored by (and appear to concern) senior management. Use of good management information is therefore itself an immensely powerful cultural driver.
To further help firms develop their management information or evidence we are today publishing separately a set of real examples covering each of the six outcomes, along with examples of MI development, oversight and action planning. These examples are designed to help firms think through their MI challenges, and we hope that they will give firms greater confidence that they can measure consumer outcomes and meet the 2008 deadlines.
Next Steps
In terms of next steps on TCF, we continue to devote a significant proportion of our resources to supporting and testing firms to help them meet the 2008 deadlines.
We have recently announced an enhanced strategy for supervision of small firms, which will include a large-scale series of structured visits or telephone assessments to test the quality of management and progress towards embedding TCF. This further contact will enable us to identify more quickly those firms which are not meeting regulatory standards.
We will carry on measuring the progress that firms are making on treating customers fairly, building on the information sources we have used in the paper we have published today but increasingly looking to use firms' own MI.
And, where we find evidence of significant potential or actual consumer detriment, we will take action.
Conclusion
We recognise that senior management in many firms are taking TCF seriously. But the pace of progress against the six outcomes needs to increase. The next fourteen months provide senior management with an opportunity to demonstrate to their staff and their customers that they can convert good intentions into real change.
This will require great energy and a willingness to tackle challenging cultural obstacles. Without such energy, there is a real risk that the deadlines will be missed – which would be a huge missed opportunity for the industry. It would also have significant regulatory consequences – we will not accept after December next year that firms simply need time to make cultural change; and the intensity of our supervisory and enforcement action will increase.
Conversely, with drive and commitment, there can be a very significant step change in the treatment of customers – with benefits for reputation and market size; and a regulatory dividend.