The Financial Services Authority's treating custo mers fairlyinitiative has attracted much attention, but the way it isbeing addressed varies considerably. Mike Williams reports
One of the first things to note about the Financial Services Authority's (FSA) Treating Customers Fairly (TCF) initiative is that it is not a new idea.
It has been around for over 10 years as a core principle of the FSA and is a key strand of its consumer protection agenda.
It is only relatively recently though that the FSA has taken steps to significantly raise the profile of the initiative by publishing an updated paper.
The paper, Treating Customers Fairly - progress and next steps, published last summer, has significant implications for all regulated firms.
At its heart are two key principles.
First, that it is a senior management responsibility.
Implementation may be delegated, but responsibility cannot.
The second, and perhaps most significant, is that TCF is a principles-based approach, a feature that creates challenges both for regulated firms and the FSA.
The challenge of a principles based approach is that it avoids hard and fast rules and check lists.
The aim is for companies and individuals to embrace the idea of customer fairness and ensure that it permeates through all their activities and becomes an integral part of the way business is done.
The logic of the approach seems sound.
If TCF were reduced to a set of rules, it would not reflect the needs of individual businesses.
Instead, it would lead to an environment where the goal is to tick boxes rather than deliver fair treatment to customers, and in the process, build consumer confidence.
While the logic may be sound, that does not make it easy.
Companies have to define what fairness means for their organisation, ensure it is implemented and then measure it.
At a recent Watson Wyatt debating forum attended by a range of senior industry figures, as well as Which? and the FSA, nearly 40% of the audience voted 'clarity in defining fairness' as the biggest challenge for their firm, followed by 'ability to evidence TCF progress' (26%) and 'principles based approach' (17%).
Grappling So why is TCF such a challenge? In addition to the uncertainty of the principles based approach, there is the sheer scope of the initiative.
It is hard to imagine a part of the business that TCF does not touch.
After all, if an area has no bearing on customers at all, how is it contributing to the organisation? The holistic nature of TCF is represented in Figure 1.
A considerable aspect of the challenge for many firms has been grappling with the scope of the initiative and how to approach such a multi-dimensional programme.
Recognising this, the FSA recently outlined the steps that it expects firms to be taking.
These include:
• Defining what TCF means to the business
• A gap analysis of capabilities and an action plan
• Defining accountabilities
• Setting appropriate measures
• Implementing the plan
• Monitoring and acting on delivery against the plan.
By way of example, particular emphasis is being placed on: The robustness of assessing target customers' needs, unders tanding their financial capabilities and the risks to customers that this creates.
This risk assessment must be evident when identifying the target likely that the other elements will fall into place fairly readily.
The audience showed that this is rarely the case with just 4% judging that no change to culture would be necessary in their organisation, while 39% saw the need for significant change and 10% the need for a total change of mindset.
With TCF it is clear that the FSA expects to see leadership from the top and, frankly, it is difficult to imagine successful cultural change in its absence.
Nevertheless, less than half of the audience believed that TCF was being led at board or executive level in their organisations.
Indeed, 25% cited senior manage ment buy in and commitment as the biggest internal challenge to the success of TCF in their firm.
Cultural change In considering the wide range of issues around TCF, it is easy to fall into the trap of imagining large insurers with teams working on the challenges thrown up by the initiative.
But this is not the case.
TCF applies to all regulated businesses - insurers (life and general), banks, mortgage providers and, of course, distribution firms, including IFAs and multi-ties.
And the FSA is the first to point out that these organisations vary widely in both their size and approach to business, which supp orts the need for a principles-based approach.
In particular, the FSA has recognised that the issues for smaller firms may be very different, but activity is still required across all areas of their business.
With the FSA noting that there have been few visible signs of action in smaller firms, this would seem to be a clear indication that action is needed sooner rather than later.
The FSA has also indicated that it will be concentrating more on smaller firms in the future and exploring the links between product providers and distributors in delivering to the ultimate customer.
It would seem likely that an area of focus for the FSA will be the impact markets.
Have companies defined their target customers or do they simply market to anybody that will listen? °Ω Remuneration of registered individuals and the systems and controls in place to reduce risks to customers from volumebased incentive structures.
Additionally, attention should also be given to HR strategies to ensure objective setting, promotion criteria and discipline drive TCF behaviours in both front and back office roles.
For example, do senior managers have performancerelated pay directly linked to the successful delivery of TCF in the organisation? °Ω The performance and quality of complaints handling and the mechanisms by which trend data and feedback are proactively used to make changes to operations, to ensure future customers are not subject to the same issues.
• The use of management information to demonstrate progress in TCF across the business, but also to monitor and highlight potential TCF risks as early as possible.
A suite of all new management information may not be required, but achieving new insights from existing data may go a long way to demonstrate how a firm has embraced TCF.
For example, using persistency, complaints and compliance data with cross referencing to product sales by branches, may identify sales management practices that need attention.
This is helpful, particularly against the background of uncertainty that the principles based approach to TCF has created - the biggest internal challenge at the Watson Wyatt debate was seen as 'knowing what to do.'
However, at the over-arching level, cultural issues are among the most difficult to deal with, but equally, the most central to TCF.
If the culture is right, if all staff genuinely see the customer as central to the business, it is that the new strengthened financial relationships between providers and distributors have had on the criteria and process for panel and product selection, and whether this is detrimental to customers.
The key is action.
The FSA has indicated that when its supervisors visit firms it does not expect strategic reviews and process changes to have all been completed.
It does, however, expect to see that firms are questioning and considering what TCF means to their business, and have begun to determine how TCF delivery and monitoring can be implemented effectively.
Finally, it is worth remembering that this is not new.
However it is a call to action and while it may feel like a lot of regulation, there is a very positive aspect to it - competitive advantage.
60% of those at the debate believed that their company could achieve competitive advantage through treating custo mers fairly.
Fair enough? Mike Williams is a senior consultant at Watson Wyatt's Insurance and Financial Services practice COVER notes ° The challenge of a principles based approach is that it avoids hard and fast rules and check lists.
• The aim is for companies and individuals to embrace the idea of customer fairness and ensure that it permeates through all their activities and becomes an integral part of the way business is done.
• TCF is regarded as a challenge because in addition to the uncertainty of the principles based approach, there is the sheer scope of the initiative.
