Treating Customers Fairly - a continuing priority
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Speech by Sarah Wilson, Director for Treating Customers Fairly, FSA
Finance and Leasing Association Conference
12 February 2008
Good morning. I am delighted to be here and very grateful that you have given me this opportunity to update you on Treating Customers Fairly - our current thinking, and our priorities for the next twelve months. As I am sure you realise, we have worked with the FLA on Treating Customers Fairly – both on the initiative generally through your membership of our Consultative Group over some time; and through our work on PPI in particular. We are keen to continue that engagement.
2008 is a very significant year for the industry's work on Treating Customers Fairly. We believe it is going to be a year of challenge, but also one of opportunity. The challenge for firms is to deliver on the two deadlines we have set: the first is that by the end of March, you should have appropriate management information in place to test whether you are treating your customers fairly. And the second is that by December, you should be able to demonstrate to yourselves and to us using that information that you are consistently treating your customers fairly.
We recognise that senior management in many firms are taking Treating Customers Fairly seriously. And we see signs that some firms are seeking to embed fair treatment of customers within their culture. But our assessment of progress to date – of which more in a moment – also shows that the pace of progress must increase if firms generally are to meet the deadlines.
I said a challenge but also an opportunity. We believe that the Treating Customers Fairly initiative presents a unique opportunity for firms collectively to bring about a step change in their treatment of consumers, bringing significant reputational benefits to the industry, and (over time) increased consumer confidence. Very many firms have recognised that there is much to do, and it is rare to find an opportunity to make change knowing that others are doing the same – a level playing field in other words.
Having set out my stall, I should like to consider three questions this morning:
- first, why is it right for the FSA to press ahead with Treating Customers Fairly to timetable despite market turbulence?
- second, what do FLA members need to focus on to meet the deadlines ?
- third, what help is available ?
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Market Turbulence
First let me say that we of course acknowledge the difficulty of current market conditions.
As you will be well aware, consensus forecasts, on which the central economic scenario of our recently published Financial Risk Outlook is based, indicate a less benign economic outlook for the UK and global economies than we have experienced in recent years. The operating environment for firms remains difficult and it seems likely that these conditions will persist, especially if investor confidence in some markets and financial institutions remains low.
Given the size and scope of FLA members’ business – providing £65.5bn to the consumer sector in 2006, including 29 per cent of all unsecured lending in the UK, and financing 50% of new car registrations in the same period – you will of course be concerned to see the extent to which poor conditions in financial markets lead to wider real economic effects. And more immediately, access to funding is a greater preoccupation than for some time, with generally higher rates and a relatively limited supply.
Against this background, however, and notwithstanding the pressures this may create, we think it is essential for firms to press on with meeting the Treating Customers Fairly deadlines. There are three reasons:
First, and put simply, fair treatment of customers matters. I know you will wholeheartedly agree, and also that many of you acknowledge that there is more to do to ensure that fair treatment is consistently delivered. As regulator, it is right that we require necessary change promptly so that consumers are treated fairly. While it has been appropriate to allow firms time to make necessary cultural change (as long of course as we continue to act where material consumer detriment is evident), we cannot do so indefinitely. Instead it is essential that we move ahead. (And I should add in passing that we will also continue to progress the other two aspects of our programme to reform retail financial markets – the Retail Distribution Review - focused on retail investment business, which is of limited concern to many of you; and the financial capability agenda.) As I have already mentioned, we also think that it would be a huge missed opportunity for the industry if we were to delay the programme after so much work.
Second, where senior management face competing priorities (as now), there is often an excellent opportunity to embed a new culture of fair treatment for customers – it sends immensely strong messages to staff and customers, for example, if senior management are not wholly deflected and continue to stay clearly committed to necessary change at such times.
And, third, market turbulence itself can present new threats to the fair treatment of customers unless senior management are vigilant. Firms under financial pressure are more at risk of, for example, mishandling conflicts of interest, unsuitable advice, inappropriate treatment of customers in arrears, and unfair application of criteria for making claims.
I hope you will agree that the risk that senior management attention is diverted away from TCF in your firms over the next few months is one that it is worth your while working very hard to avoid.
Focus on the outcomes
Assuming that I have convinced you so far, I should like to turn to what FLA members need to focus on to meet the deadline at the end of this year.
You will I hope be well aware that, rather than focusing on rules and processes, we have defined six consumer outcomes against which firms can measure whether or not they are treating their customers fairly. The first concerns the culture of a firm, and the remaining five cover what we call the "product-life cycle" – product design, marketing and promotions, information before, during and after the point of sale, advice, and post-sale service in its varying forms.
In our experience, the product life-cycle framework, developed in collaboration with the industry (and our Consultative Group), has helped management consider their business in a more connected way and so identify the links that can help to ensure consumers receive a fair deal. And in response to many requests, we completed it last year by consulting on and then publishing guidance on the respective responsibilities of producers and distributors where the product life-cycle occurs across several firms.
The starting point for any firm is to consider which of the outcomes applies to their business. We are then asking you to assemble and make proper use of evidence that establishes whether or not you are meeting the outcomes relevant to you. This can be quantitative or qualitative information from a wide variety of sources and with varied frequency – there may be much of relevance in your standard ‘MI pack’ but it will not be one and the same. And finally, where that evidence points to deficiencies, you need to put matters right. We are not expecting perfection by the end of December, but we do expect cultures to exist such that the mistakes are occasional only, and are quickly spotted and put right.
So let me turn then in more detail to what this means for FLA members.
Outcome 1 - consumers can be confident that they are dealing with firms where TCF is central to the corporate culture - is clearly relevant to all firms. Overall in the financial sector, we have found that that large and medium-sized firms are increasingly 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. That requires, for example, use of the right outcomes focused management information and a searching appraisal of the incentives created within a firm, including through remuneration structures. And, in part as a consequence of the difficulties in achieving such change, we have not yet seen much success by senior management in delivering fair consumer outcomes throughout their organisations.
For FLA members there is on the face of it a further complication – as typically the majority of your business is not actually FSA regulated. I have two observations. First, while we do not seek to apply our Principles and rules outside the areas we have responsibility to regulate, it seems to me odd (and rather counter-productive) for a senior management to attempt to create more than one culture in a firm. I would therefore assume that senior management might apply Outcome 1 across their business. Second, it is anyway the case that our fellow regulator, the Office of Fair Trading, have themselves adopted a regulatory approach based on the principle that customers are best served by competitive markets where businesses compete fairly and want to treat their customers fairly. And I am aware that your own Lending Code commits you to "act fairly, reasonably and responsibly" in all your dealings with customers. So while the language may vary a little, all parties are looking for a similar cultural outcome.
The remaining five outcomes cover the product lifecycle, and it is only relevant for me to discuss them in terms of your FSA regulated business. While some FLA members do of course operate in more than one sector, I shall restrict my comments to issues covered by the FLA – in other words provision of asset, consumer and motor finance. From an FSA perspective, this encompasses a limited amount of regulated lending (that is secured lending on a first charge, but not for house purchase) and a rather larger amount of general insurance distribution.
Outcome 2 is that products and services are designed to meet the needs of identified consumer groups and targeted accordingly. This outcome will be of relevance to FLA members which offer secured first change lending, design insurance products (albeit as distributors), or advertise either of these.
Our overall conclusion across financial services is that we have seen an improvement in product design processes but that there is also more to do. 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. However, we have found that more work is required by firms – to identify target markets, stress-test products, and introduce adequate systems and controls.
For FLA business specifically, our evidence on PPI – on which I will say more in a moment – suggests that there is more to do. We don’t have direct evidence on design processes or targetting for other forms of insurance. As with other outcomes, we are asking you to assemble evidence to satisfy yourselves and us that you consistently meet this outcome.
Outcome Three is that consumers are provided with clear information and kept appropriately informed before, during and after the point of sale.
Our overall conclusion is that there is a lot more to do before outcome 3 could generally be said to be true across retail financial services. We continue to see examples of poor quality information. Having said that, we have seen progress in general insurance advertising and product disclosure. We found that more than half of motor insurance savings claims in firms’ press adverts from 2006 were unclear or misleading, but this figure had reduced to less than 5% by April 2007. On general insurance product disclosure (which is usually the responsibility of the firm designing the product), there were encouraging improvements between 2005 and 2006, but we have drawn attention to two continuing problems:
- when buying a product, consumers are more influenced by what they hear than what they read, so there is potential for detriment when a sales conversation does not give a complete and balanced description of a product’s key elements; and
- some firms did not disclose all important policy information (ie significant features and exclusions) before contract conclusion.
Once again, we are asking you to provide evidence that you are delivering Outcome 3.
Outcome Four is that, where consumers receive advice, it is suitable and takes account of their circumstances.
Overall, 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. We think management in many firms needs to consider what they really know about the quality of advice given and satisfy themselves that it is suitable.
More specifically, work published in March 2007, found that on advice the market works reasonably well for consumers of commoditised general insurance products such as motor cover. By contrast, on personal protection products such as PPI, advisory firms were, for example, not collecting all the information they needed to make a recommendation. And we have published disappointing results on the quality of mortgage advice processes, and treatment of consumers in the sub-prime mortgage market in particular.
My question is simple – across the markets in which you operate, do you know whether the advice you give is suitable?
Outcome Five is that 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.
Across retail services as a whole, while in very broad terms, financial products and services generally function as expected, our disappointing findings on information and the risk of poor quality advice suggest that consumers may often not experience the specific product and service features they expect. Firms – including those such as yourselves distributing general insurance or providing secured loans - need to work harder at reducing the risk of creating false consumer expectations through improving the quality of their advice and information. The quality of service provided to consumers in financial difficulty may also become an important focus given changing economic conditions.
Finally Outcome Six is that there are no unreasonable post-sale barriers imposed by firms when consumers want to change product, switch provider, submit a claim or make a complaint.
In this case, available evidence has prevented us from drawing general conclusions across financial services on the extent or otherwise of unreasonable barriers – although we did note in 2006 some improvements in general insurance claims handling; while complaints handling shows a mixed picture. Once again, we will look to you to evidence the position for your firm.
PPI as an example
Finally on outcomes, it is instructive to use PPI as an example.
Outcome 1 (culture) – Our latest review into the sale of PPI, published in September 2007, showed there had been improvement in some areas, but also that – despite extensive regulatory work in this area - many firms are still failing to treat their customers fairly when selling PPI. Continuing poor PPI sales practices could suggest that although TCF is being implemented in firms, the necessary TCF Outcomes are not being effectively communicated, delivered and tested throughout the organisation and with front-line staff – an absence in other words of a TCF culture.
Outcome 2 (product design) – We acknowledged in our September report on the sale of PPI that it can be a useful product for some consumers. However it is not necessarily appropriate for all. We expect firms to define their target audience and then design and market the PPI policy with this target audience firmly in mind. Despite this, it appears that many firms assume that nearly all customers have a potential PPI 'need' and, in most cases, those customers will be sold a single premium product. This is often because firms have chosen to only offer a single premium product at the point of sale, regardless of whether or not it is appropriate for their customer base.
We do not believe that many PPI policies offer sufficient flexibility, and nor are they tailored to customers needs. There are, for example, instances where firms know their customer base is likely to consolidate or refinance their loan only three years into the contract, and yet they recommend purchase of a five year PPI contract, in some cases paying for it over a longer period. It is difficult to see how a firm can reconcile the inflexibility of a single premium policy with their knowledge and experience of their target market. Senior management need to consider whether they have designed a product with the target audience in mind.
Outcomes 3 and 4 (information and advice) - Our last review of the market found that firms had improved by telling customers that PPI is optional and by offering refunds for early cancellation. But around a third of firms visited and a significant minority of firms mystery shopped failed to ensure consumers were given the basic information necessary to make an informed decision about the product.
We are particularly concerned that some firms selling single premium PPI policies are still not clearly explaining to consumers the payment structure of the product and its main elements (such as price and refund terms).
Outcome 5 (product performance) - In PPI, we see fewer claims, and a lower percentage of successful claims than most other types of personal insurance – with such a rejection rate, it is legitimate to ask (and we would expect senior management to be asking) whether the policy worked in the way the consumer expected. In our most recent work, we found that a third of firms were unable to demonstrate to us they had properly established whether customers were eligible to claim under the different elements of the policy.
Outcome 6 (no reasonable barriers) - As you will no doubt be aware the industry has seen a sharp rise in the number of complaints regarding PPI. We will be working to ensure that firms handle complaints appropriately. Firms should take the time to examine each case on its merits.
Help on TCF
I hope I have persuaded you that the Treating Customers Fairly initiative is important and that this year is very significant, and that I have shown you reasonably specifically what this means for FLA members. Finally I should like to finish by commenting on sources of help.
We have worked in collaboration with industry to produce illustrations of what we would like to see firms achieve on Treating Customers Fairly - through case studies, through examples of good and poor practice, and through individual initiatives by trade associations.
Last year we also published a culture framework, again reflecting input from our Consultative Group, which was designed to assist senior management identify the obstacles that prevent firms from translating good intentions into change at the coalface. Feedback suggests firms have found this particularly helpful.
To further help firms develop their management information or evidence we have published a set of real examples covering each of the six outcomes, along with examples of MI development, oversight and action planning. Following staff training, we are now starting to visit and discuss with firms the management information they are producing for the March deadline. We plan to report on progress in the second quarter of the year, and will include more examples of good practice then.
We also continue with our programme of thematic work. This draws attention to areas where remedial action is required (or not) by firms in order to treat customers fairly, and is a valuable input for senior management looking for ideas on areas of high risk to focus on.
Beyond all this, many firms are seeking other types of external input to help identify the TCF issues relevant in their case or to identify methods of measurement. An external perspective can be helpful and is available from a range of sources – quite apart from FSA material, firms might for example gain it from consumer feedback or research; from other firms (for example a product provider could give an intermediary an understanding of their performance relative to peers); or from trade association sponsored material or workshops. Network members will also expect their network to offer assistance and monitor their performance. And some firms will choose to use external consultancies although we have always stressed that this is not a necessary part of a firm’s TCF work. Whatever the source, it is important that the questions put are carefully framed to ensure that the firm generates genuine evidence about performance against the TCF outcomes. By contrast, we have come across examples of input that simply generates too much data; or which is focused on customer satisfaction rather than fairness, or exclusively on process rather than outcome.
Conclusion
In conclusion, we fully recognise that senior management in many firms are taking TCF seriously. The next ten months are key – where necessary, firms need to translate good intentions into measurable improvements in the the treatment of customers. This will require renewed focus and energy from senior management and firms. Without such focus and energy, there is a real risk that the deadlines will be missed.
For those firms that rise to the challenge, where senior management drives change with focus and energy in the next ten months, there will be a regulatory dividend – supervisors will have no reason to ask further detailed questions if you produce and use robust measures of your performance and they show a good 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.
I do hope that, notwithstanding a difficult external environment, FLA members will take the opportunity to make change - so bringing benefits to consumers, enhancing reputation, and increasing the prospect of market growth over the longer term.