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Speech by Sarah Wilson, Director, Treating Customers Fairly, FSA
6th Annual BBA Treating Customers Fairly Seminar
29th September 2008

First of all I would like to thank the BBA for its work in promoting the Treating Customers Fairly initiative and building understanding of what we are trying to achieve.  As you know, our aim has been to deliver a step change in the industry (when looked at collectively) so that consumers would be more likely to receive consistently fair treatment from the industry.  The work required as a result by individual firms has varied enormously - in scale and complexity - but the acceptance of many in senior management that there is much to do has enabled us to proceed in a collaborative fashion.  The support (and constructive challenge) of bodies such as the BBA has been central to the TCF programme.

You have asked me here to share my observations about how the industry is progressing towards the deadline.  In that spirit, my agenda is threefold.  First, I will share with you my broad assessment of how the banking sector is delivering.  Second, I will share observations on how firms that are more likely to deliver fair treatment are behaving.  Finally I will refer to examples of pressing conduct of business issues on the FSA's retail agenda which banks will need to fix if they are to deliver the TCF outcomes and meet the deadline.

But before I move to cover these issues, I should of course acknowledge the very stressed market conditions in which you are operating.   As Hector Sants said a few days ago economic and market cycles are inevitable and a downturn of some magnitude was largely expected by commentators and regulators.  The FSA sees this as a three stage cycle, beginning with market confidence and liquidity issues, then moving to a recapitalisation of banks and finally working through the implications of the impact of those first two stages on the real economy.  This third stage has potentially severe implications for consumers and presents a credit management challenge for financial firms.  While this last stage is in many ways relatively well trodden territory for regulators and for firms’ management, it underlines the need for senior management to persist in focusing on ensuring that customers are treated fairly.
Turning then to banking sector progress on the Treating Customers Fairly initiative.  Like other sectors, firms in this sector currently show mixed progress.  There is very good work going on in some cases.  Occasionally, we find that a bank has really not grasped what is required and has simply assumed that all is well.  In the majority of cases though, we find that while senior management are committed and progress is being made, banks still have some way to go before they and we can be confident that they highly likely to be consistently treating their customers fairly. 

It is of course important to note that ‘banks’ are themselves a diverse group of businesses.  Notwithstanding the wider scope of our Principles, the Treating Customers Fairly initiative is primarily concerned with retail clients.  The focus of our supervisory effort is therefore on those parts of your business that 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.  While this excludes certain activities, it does make the initiative relevant to high net worth clients as well as high street customers; and therefore relevant to private banks as well as to the larger more broadly-based institutions.   We are not seeking to over-ride legislation or our Handbook where it talks of a differentiated approach depending on consumers’ capabilities – and we do understand that customers of a private bank are often different and able to understand financial information differently (or to employ advice).   Equally, senior management in such firms will still wish to satisfy themselves – through the analysis of all evidence or MI available – that they consistently treat their customers fairly, whether in the context of financial or wealth planning; mortgage lending or fund management.  And we will ask to see such evidence.  We are pleased to see that, in addition to the material we have published, APCIMS in particular has published TCF material of relevance in such cases. 

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Consumer outcomes

You will I hope be entirely familiar with what we are trying to achieve - we expect that by the end of the year firms will be delivering those TCF outcomes relevant to the product or service they sell.  In other words:

• All firms will need to be able to demonstrate that consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture;
• And where relevant to their business, firms will need to be able to demonstrate that:
  • products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly;
  • consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale;
  • where consumers receive advice, the advice is suitable and takes account of their circumstances; 
  • 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; and
  • consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

Achieving good progress against the deadline

As the deadline approaches we have been asked by various firms for clarity on what we expect them to have achieved. This follows the fact that many firms were surprised to have been judged not to have met our March deadline – as you know, we found relatively few relationship managed firms in our sample had appropriate management information to test whether they were treating their customers fairly.

We have reflected carefully on these requests. Overall we consider that we have been very clear about what we expect firms to deliver. Moreover, and beyond the outcomes, we have published guidance on the relative responsibilities of producers and distributors; case studies; and very extensive examples of good and poor practice – most recently on TCF evidence or MI. We are extremely wary about yet further detailed material – this is after all a principles-based initiative where senior management should have the freedom to determine both how they will deliver the TCF outcomes and associated regulatory requirements, and how they will demonstrate to themselves that they are doing this. Just as senior management want more clarity, so they are quick to comment if they feel that we have moved to set a standard in a detailed area or behaved as management consultants. TCF is not a one size fits all model, and what is required will differ from business to business depending on the size and structure of the firm and the market in which it operates.

So in my remaining remarks, I will ‘unpack’ a little the statements made in June about what firms need to do by December, but without providing ‘new’ material.

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In June this year, we said that firms should by December be able to demonstrate four things.

First, they should demonstrate that senior management have instilled a culture whereby they understand what the fair treatment of customers means; where they expect their staff to achieve this at all times; and where (a relatively small number of) errors are promptly found, put right and learned from.

We explained what we meant by ‘culture’ in the context of TCF last year, when we published a ‘culture tool’ – itself designed after piloting across firms and with input from the TCF consultative group. This is designed to help senior management identify areas of risk to TCF outcomes in the culture of the firm, and if you are unsure about what you should be considering in the area of culture, I encourage you to use it. It has received excellent feedback. The tool identifies six drivers of a firm's behaviour and allows you to identify underlying causes of unfair treatment. Leadership is central - where there is strong leadership with a clear vision of what treating customers fairly means for the firm, it is more likely to have a culture which is geared towards delivering fair consumer outcomes. The firm's Strategy is relevant – and insofar as current market conditions cause firms to alter their strategic direction, senior management should consider the implications for customers as an integral part of their planning. Decision-making at all levels within the firm will also impact. And Controls, including management information, are important so that senior management in the firm can satisfy themselves that the customer is being treated fairly. And then there are the people issues. Recruitment, training and competence - firms can influence the delivery of fairer outcomes by recruiting staff with appropriate values and skills; training staff effectively; and assessing and monitoring their competence. And very topically at present of course, Reward strategy is key. This is about both remuneration and career progression. We have recognised the desire for firms to establish targets, where appropriate, which will lead to growth in the business and sustainable and increasing profits. But we have also sressed that firms should incorporate these into remuneration and career progression structures this motivate their staff to deliver good TCF outcomes at the same time; and where necessary they should put in controls actively to manage unbalanced reward schemes.
Those firms that showed good practice against the March deadline had treated TCF as something which needed to be built into the firm's culture. For example the firms’ own commercial strategies were consistent with fair treatment of customers. The offering to the customer was built into the firm's corporate strategy or mission. Such firms demonstrated active senior management involvement, with their approach championed at board level and driven through the firm by senior management. Good firms were also more likely to have ensured that the fair treatment of customers was written into personal objectives and reward at all levels and to have good processes for listening to, and acting on, feedback from customers.

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The message from these findings seems clear – firms that had understood what they needed to monitor to assess their performance against TCF outcomes had also understood TCF in a cultural sense. It seems that the cultural thought process had undoubtedly added value.
Second, and integral to a good culture, we expect firms to be appropriately and accurately measuring performance against all customer fairness issues materially relevant to their business, and be acting on the results.

We know from our assessment against the March deadline that firms have found it difficult to identify appropriate management information. When we published our findings we included extensive examples of good practice to assist firms. This material, together with the material we have published over the years of this initiative should give firms help in identifying appropriate measures.

However, the key is development of evidence and measures that are really used by senior management. We don't want to see firms generating management information just to satisfy a visit from the regulator. We understand completely that a file badged as TCF MI is not worth anything unless it really is used by senior management as a way of measuring how the firm is behaving and whether outcomes are being met. Just as we did in March, senior management can usefully check whether they are measuring performance against the outcomes rather than simply conformity with internal processes; and whether they are measuring fairness rather than customer satisfaction. And, as with any other information relied upon, senior management will want to satisfy itself that information on performance against TCF outcomes has integrity – for example, that those measuring suitability of advice are qualified to do so, and that their work is overseen or checked at least periodically in some way.

Third, the measures are just one part. We also expect firms to be demonstrating through those measures that they are delivering fair outcomes.

After many years of work, we would expect you to be delivering a very strong performance. For example we have seen many instances of improved product design processes and, given the clearer responsibility, accountability and control for product design and governance which we reported last year, we would expect a significant number of firms to see positive results on relevant outcomes.

A ‘very strong performance’ does not mean 100% delivery on all occasions, but – on rare occasions when things go wrong – we would expect senior management to have put in place clear accountabilities and timelines for taking action.

Finally we expect firms to have no serious failings – whether seen through MI or known to us directly– including in areas of particular regulatory interest previously publicised by the FSA.
Here it is instructive to consider examples of the current TCF issues facing the banking sector. I do appreciate that most firms want to meet the deadline. However there are some very significant issues in the marketplace which, where they are allowed to persist, will demonstrably mean that the banks in question have not met the December deadline.
The first example is PPI, where we continue to believe that poor sales practices are resulting in poor consumer outcomes. PPI can provide important protection for consumers, but they are entitled to expect that they will be treated fairly by firms when they buy it. They must be told how this product works, what it covers, and how much it costs. We expect firms to improve their sales standards or they will not be judged to be delivering their regulatory obligation to treat customers fairly.

My second example is handling of arrears where we reported our concerns in August. In a recent review we found that mainstream lenders were largely complying with FSA requirements, whereas there were particular concerns with specialist lenders – including that they focused too strongly on recovering arrears according to a strict mandate without reference to the borrower’s circumstances; were too ready to take court action; and had lower standards of sytems and controls in place. But we also did find issues with lenders in general – including that some could have done more to consider customers' individual circumstances and offer more options to resolve the arrears position; imposed charges in circumstances that could result in the unfair treatment of customers; and did not exercise sufficient oversight of third parties contracted to carry out mortgage arrears and repossessions handling activities on their behalf. Again, firms where these issues are not solved are at high risk of failing to deliver the TCF outcomes.

At the time that we published our findings on arrears, we also commented on some work on lending practices. Unfortunately this is rather less topical as the volume of lending has of course fallen, but it is still worth noting that we had found that that some lenders (particularly those that offered mortgages to consumers with impaired credit) were not checking income where they should have had reason to doubt the amount declared and self certification of income was being used without adequate justification being recorded by the lender. Overall, we found that lenders could have been more cautious in their approach to lending; more stringent checks could have been applied to ensure customers had the ability to pay over the life of the term, and in determining affordability, more emphasis could have been put on checking customers’ general expenditure as well as expenditure on credit. Lenders need to resolve these issues where they are relevant to them if they are to avoid being at high risk of failing to meet the TCF outcomes.

Finally, unfair terms in customer contracts which result in material levels of consumer detriment are also inconsistent with meeting the TCF outcomes. Despite our reminders to firms about their obligations under the Unfair Terms in Consumer Contracts we were disappointed to find that when we reviewed mortgage contracts recently, around one third of the mortgage contracts sampled included terms which allow firms to vary charges unfairly.

In conclusion, I hope I have fulfilled my remit – giving a sense of where banks are and what more might need to be done to successfully reach December. We continue to believe strongly, not least in current market conditions, that progress is both essential and hugely in the interests of the industry. I hope you do to.

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