• FSA Library
  • Communication documents
    • Speeches

Speech by Sarah Wilson, Director for Treating Customers Fairly, FSA
Protiviti Breakfast Meeting
15 April 2008

Introduction

Good morning and thank you to Protiviti for giving me this opportunity to discuss the relevance of Treating Customers Fairly for wholesale financial markets.  In my remarks, I should like briefly to address the following questions:

1. What is TCF?
2. Why TCF?
3. Why should we persist with it at a time of market turbulence?
4. Why a focus on use of MI, and what do we mean by this?
5. Which groups of consumers are we interested in?
6. Which firms are we interested in? – distinguishing those directly and indirectly dealing with the customer.
7. What MI do we expect?

1. What is the TCF initiative?

Treating Customers Fairly is a principles-based initiative which challenges firms operating in retail financial markets collectively to make a step change in their treatment of customers. We are asking firms to focus on outcomes rather than process and detailed rules, and have defined six consumer outcomes against which firms should measure progress¹. These outcomes are:

• Outcome 1 - consumers can be confident that they are dealing with firms where TCF is central to the corporate culture.
• Outcome 2  - products and services are designed to meet the needs of identified consumer groups and targeted accordingly. 
• Outcome 3 - consumers are provided with clear information and kept appropriately informed before, during and after the point of sale.
• Outcome 4 - where consumers receive advice, it is suitable and takes account of their circumstances.
• 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.
• Outcome 6 - 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.

There is no presumption that every firm has widespread changes to make in their treatment of customers. But every firm needs to move to a position where senior management is actively measuring and responding to information on the outcomes it achieves for customers.  And very many firms have found that they need to improve what they do – often significantly.

We expect all firms to be able to demonstrate to themselves and to us that they are consistently treating their customers fairly by the end of December this year. The Principles in which the initiative is rooted have of course been long standing regulatory obligations.

Back to top

2. Why is the TCF initiative necessary?

We have often – most recently in our TCF progress report published last November - that we recognise that senior management in many firms are taking TCF seriously. And we have seen signs that some firms are seeking to embed fair treatment of customers within their culture.  For example, we have seen an improvement in product design processes; progress on the clarity of information in financial promotions; and some improvements in mortgage and general insurance product disclosure.

However, our review at that time led us to note little evidence that firms’ work on TCF is translating to improved outcomes generally.  And we continued to see unfair treatment of consumers.   While it is reasonable to allow time for cultural change, it is not acceptable for problems to persist for an extended period – after all, consumers deserve fair treatment now.

We also believe that there are significant benefits for industry if firms rise to the TCF challenge – in terms of reputation and the associated impact on longer-term market growth. In addition, those firms that demonstrate delivery of the TCF outcomes can expect a regulatory dividend through less intrusive supervisory testing.

3. Why should we persist with TCF at a time of market turbulence?

Firstly, we of course recognise the scale of the current market turbulence and its impact on a range of firms.  

Second, however, we believe it is important to continue with TCF because:

• Treating Customers Fairly is an existing regulatory requirement - FSA's Principle 6.  Firms have devoted significant energy to make necessary cultural change, and a major opportunity would be lost if this were not now to be capitalised on to deliver real improvements for consumers.
• When senior management face competing priorities as they currently (and frequently) do, there is an excellent opportunity to embed a new culture of fair treatment for customers. Firms will send a strong message to staff and to customers if senior management are not wholly deflected from TCF and continue to stay clearly committed to necessary change during such times.
• And firms under financial pressure are potentially at more risk of treating customers unfairly by, for example, overzealous selling, providing unsuitable advice, applying unfair claims criteria, or inappropriate treatment of customers in arrears.

4. Why a focus on use of MI, and what do we mean by this?

You will be aware that we have placed a strong emphasis on management information.  In order to demonstrate that they are delivering fair outcomes, firms need to have appropriate management information in place.

Why?  We want to achieve lasting change – ie change that is embedded in the culture and behaviour of firms and which will therefore genuinely lead to lasting improvements in outcomes for consumers.  In our strongly held view, senior management really committed to good outcomes for consumers will monitor what their firm achieves at the coalface and act on the information received – and where we see this happening, we can be confident that incentives and behaviour within the firm are altering in a sustainable longer-term way.  (It may also be that a firm measuring the right things still struggles to make change.  In that case, we have argued that it should look at the cultural obstacles within the firm more systematically, and we have provided a framework to help senior management to do this; and which we are told firms find very useful.)

So what information are we talking about?  Management information means any evidence collected periodically by the firm that shows whether or not the TCF outcomes are being achieved – it can be qualitative or quantitative; it should not focus on consumer satisfaction; it should not focus solely on processes – we will look for evidence of the outcomes themselves being achieved; and it should be analysed and acted on.

Back to top

5. Which groups of consumers are we interested in?

The FSA's TCF initiative is concerned with a firm's obligation to treat its customers fairly.  This obligation is based primarily on Principle 6 (under which "a firm must pay due regard to the interests of its customers and treat them fairly") but other Principles, such as Principles 2, 3, 7, 8 and 9 are also relevant.

Principle 6 applies to all "customers", defined in the Handbook – broadly – as clients who are not eligible counterparties. While this can encompass a wide range of entities – including, for example, professional clients such as commercial enterprises – the TCF initiative, being risk based, is primarily concerned with retail clients. The focus of our supervisory effort is therefore on firms who design, market or are involved in the operation of retail products or services; those that distribute retail products; and those that have a contractual or other relationship with retail customers (including as a result of producing or distributing a product) such that they provide an on-going service of some kind.

We are not seeking to over-ride legislation  or our Handbook where it talks of a differentiated approach depending on consumers’ capabilities – we do understand, for example, that the customers of private banks are frequently different from those of a high-street bank and able to understand financial information differently.

I was asked particularly to comment on circumstances where there is an overlap between MiFID and Treating Customers Fairly.  You may be all too familiar with the fact that Art 19(1) of MiFID (found in COBS 2.1.1R) states that a firm must act honestly, fairly and professionally in accordance with the best interests of its client (the client's best interests rule). Broadly, a firm acting consistently with MiFID in this regard would therefore also be acting consistently with TCF.  However, TCF is a regulatory responsibility for regulated firms generally, whether or not covered by MiFID, and so we do not distinguish between MiFID and non-MiFID firms when considering what a firm should do to meet the TCF outcomes.

6. Which firms are we interested in?   

Firms directly involved with the end retail clients

Firms directly involved with end retail clients include both providers and distributors of retail products and services.  The TCF initiative is clearly relevant to such firms, and we would expect them to be able to evidence that they are meeting all of the TCF Outcomes that are relevant to them.  Examples of firms directly involved with end retail clients include:

• a Lloyd's market syndicate that underwrites motor insurance; and
• a stockbroker providing advice and portfolio management services to individual investors, including high net worth investors.

The Guidance we published last year on provider and distributor responsibilities goes into detail about the respective responsibilities of providers and distributors throughout the life-cycle of a product.  (It covers provision and distribution of services such as portfolio management as well as products.)  Several trade associations have provided further relevant useful material on these responsibilities.

Back to top

Firms not directly involved in dealing with the end retail client

Firms (or business lines within firms) that are never involved directly with end retail clients are outside the usual scope of our TCF initiative where their actions do not have a material impact on the outcome for end retail clients.  We would not normally, as a part of the initiative, be assessing such firms or business lines for evidence that they are treating their customers fairly; and indeed in some such cases Principle 6 does not apply.   But they would of course need to meet (and have systems and controls to secure compliance with) their regulatory requirements - for example Principle 2 'due skill and diligence', Principle 3 'management and controls' and Principle 6 if relevant.

Examples of this include:

• an investment bank contributing a component part to a structured product put together by a retail bank (where the investment bank does not end up with a contract with a retail customer as a part of the transaction and does not have a significant influence over the design of the product). In this example, the entity that has the TCF provider responsibilities, and therefore must evidence that it is meeting the relevant Outcomes, would be the retail bank.
• a hedge fund manager providing investment management services to a hedge fund. In this case, the products are not intended to end up with retail clients, so we would not view this as an area on which to focus the TCF initiative.
• insurance broker providing advice to large commercial enterprises that are categorised as professional clients.
• investment manager providing portfolio management services to an institution, that is not in itself a conduit to retail customers – i.e. the product for which management services are provided is not designed to end up with retail customers.

There are however situations in which a firm does not deal directly with end retail clients (or even necessarily know who the end consumers of the product are) but where the firms' actions do have a material impact on outcomes for retail clients and therefore where the TCF initiative is highly relevant.  In these cases, we would expect to assess evidence, as a part of the initiative, that the Outcomes are being met.  In addition to the investment bank noted above where it designs or significantly influences the design of the product, examples of this include:

• an investment manager for funds that are designed to end up in the retail market. This applies whether or not sold through a platform or other nominee account. Such a firm would need to be able to evidence that it is meeting the Outcomes relevant to the role it plays in the distribution chain. Typically, all Outcomes other than Outcome 4 (suitable advice) will be relevant.
• a portfolio manager providing investment management services to a pension trustee for a personal pension product. In this case, the investment manager is not directly involved with the end retail client, but is involved in the operation of a product that is intended for retail clients. Such a firm would need to be able to evidence that it is meeting the Outcomes relevant to the role it plays in the distribution chain. Typically, all Outcomes other than Outcome 4 (suitable advice) will be relevant.

Back to top

7. What MI do we expect?

The relevance of each of the outcomes to a firm, and hence the need to create and use MI, will depend on its role in the distribution chain.  Taking each Outcome in turn, (and using the terms ‘provider’ and ‘distributor’ to encompass services as well as products where relevant), the position can be illustrated as follows:

Outcome 1 (culture)

This applies to all parties.  I will not discuss this outcome further today as it is not central to the issues we are illustrating.

Outcome 2  (product design)

This outcome is generally most relevant to product providers (although it might apply to the distributor if they in fact design a product in any particular case).  In the Guidance on provider / distributor responsibilities that we published in July 2007 we indicate what we expect of providers in respect of this Outcome.  For example, we expect providers to:

• Identify the target market, namely which types of customer the product or service is likely to be suitable (or not suitable) for.
• Stress-test the product or service to identify how it might perform in a range of market environments and how the customer could be affected.
• Decide whether this is a product where customers would be wise to seek advice.
• Review how what is occurring in practice corresponds to (or deviates from) what was originally planned or envisaged for the distribution of its products or services given the target market. This involves collecting and analysing appropriate management information such that the firm can detect patterns in distribution as compared with the planned target market, and can assess the performance of the distribution channels through which its products or services are being distributed. The firm should then act when it has concerns, for example by ceasing to use a particular distribution channel.

We expect to see MI to evidence these responsibilities are being met.  Quite apart from MI relating to the robustness of product design itself, this would include - and we have seen - firms tracking trends (such as redemptions, persistency, claims, arrears, demographic characteristics of customers etc) to identify unusual trends at a distributor or through a particular distribution channel.  Once unusual patterns are found, the MI needs to record action taken.

Outcome 3 (clear information)

This outcome is normally relevant to both parties.  Amongst other matters, and as we explain in the provider / distributor Guidance, providers need to satisfy themselves that information provided to distributors is sufficient, appropriate and comprehensible in substance and form.  Examples of relevant MI we have seen include:

• Survey of distributors to check understanding of product and product literature and collation of feedback from distributors to assess the same. This was then followed up by changes to parts of product literature.
• Measuring actual volume sold against expected sales volume through each distribution channel. Where actual volume exceeds expectation, the firm reviewed product literature to see if any exaggerated claims were being made.
• Measures for the quality of the sales force who are selling to distributors. Since the target customers are distributors rather than customers, there is a tendency to have less monitoring of the sales force. Whilst this may be legitimate, it is still important to have measures of sales force quality (e.g. what percentage are making errors in characterising the product?)

For product providers also, post sale information to consumers is often critical and can currently be of poor quality.  Again, we would expect to see MI on information quality and steps taken to improve it where necessary.

Back to top

Outcome 4 (suitable advice)

This outcome is typically relevant to distributors. We often see MI that is developed from monitoring the sales force. For example, percentage of sales where advice is suitable, and also associated measures relating to sales force quality – training, analysis of performance against quality measures etc. We would expect the monitoring to be robust and to see action taken to rectify any shortcomings.

Outcome 5 (meeting consumer expectations)

This outcome is typically relevant to both parties. For product providers, we have said that they should periodically review products whose performance may vary materially to check whether the product is continuing to meet the general needs of the target audience that it was designed for, or whether the product's performance will be significantly different from what the provider originally expected and communicated to the distributor or customer at the time of the sale.

Firms use a range of ways to measure this; for example, they may undertake a regular review of products to see if any are consistently underperforming and then take steps to remedy this, including on occasion by closing down the fund, while ensuring customers have appropriate options to move into a better fund that is designed around similar investment objectives.

On the distributor side, the key consideration is often to ensure that any expectations of on-going service that have been created are met.  For example, if you manage someone's portfolio and indicate that it will be regularly monitored, then we would expect you to have MI to evidence that appropriate monitoring is taking place.

Outcome 6 (post-sale barriers)

This is typically relevant to both parties. Often root cause analysis of complaints provides helpful MI around this outcome for both providers and distributors.  Other MI examples includes:

• In the case of an insurer, research carried out with customers to make an assessment of how easy they found the claims process, whether they were kept informed and what improvements the firm may be able to make.
• In the case of an investment provider and intermediary, the provider charged early exit penalties on investment bonds and it analysed data that showed the number of cancellations within the charge period (6 years). These volumes were checked to give the firm confidence that the exit penalties were being incurred in line with expectations.  Customer feedback was obtained to understand the reason for early cancellation where an exit penalty applies and to check the customer's understanding of the penalty that they had to incur.

Asset management and platforms

We recognise that there are challenges for managers of UK authorised collective investment schemes when collecting certain MI. These firms are operating in an increasingly dis-intermediated sector, where the use of nominee accounts is widespread, and consumers (including details of their portfolios) are often not known to the CIS manager.  Also, funds are designed to be used in various ways, for example, singularly or as part of a portfolio.

In recognition of this, we published in January a good practice illustrations paper elaborating what we expect of CIS operators when identifying a target market and when reviewing how what is occurring in practice corresponds to what was originally planned for a product.

We made it clear in this paper that the presence of a platform does not in any way reduce the responsibilities on a product provider to treat its customers fairly.  A firm cannot do less because its products are sold through a platform than what it does where products are not sold through a platform. 

Conclusion

I hope my remarks this morning have clarified what we are seeking to achieve with TCF, and how it applies to your firms.  Although many firms are facing unusually challenging market conditions, we believe that it is vitally important to continue with the initiative.  We hope that the next eight months sees continued focus and energy from senior management so that they can translate their good intentions into measurable improvements in the treatment of customers, and meet the two deadlines we have set.  In doing that the industry will have seized a rare opportunity collectively to shift consumer outcomes, and so enhance its reputation with wider benefits over the longer-term.

Back to top