A year after the FSA stepped up its fight against firms that do not treat their customers fairly, can we see any tangible improvements? Johanna Gornitzki investigates
In July 2005 the Financial Services Authority (FSA) launched its treating customers fairly (TCF) initiative. While the TCF concept is nothing new, the purpose of the regulator's initiative was to challenge firms to review their position and, more importantly, show them once again that taking care of customers should be integral to the way business is conducted.
In particular, the FSA aims to achieve four things - capable and confident consumers; simple and understandable information for, and used by, consumers; well-managed and adequately capitalised firms, which treat their customers fairly; and risk-based and proportionate regulation.
Divided
So how can this be accomplished? This is the tricky question because while the regulator has been clear in setting out its goals, it has deliberately avoided outlining any precise definitions of TFC, leaving it up to senior management to reflect on what it should mean for their business.
Views are divided on whether this is a good thing. Mike Williams, senior consultant at Watson Wyatt, thinks it is a great approach. "It is an adult-adult relationship rather than an adult-child approach.
"It makes very good sense as it spurs companies to think it through and do what is right for them," he says.
However, Alan Lakey, partner at Highclere Financial Services, argues the liquid concept has left the industry unable to certify what TCF actually stands for, leaving it open to future misinterpretations. He says: "No one really knows what TCF means. While it has purposely been done this way by the regulator - allowing advisers free range - I do not welcome vagueness as there is no way we can ever be sure that we are compliant," Lakey says.
He also believes that it could lead to disputes between companies and the regulator, warning: "I think there will be some arguments between firms and the FSA due to the liquid concept and the lack of rules."
With this in mind, it is no surprise that the biggest hurdle for firms over the past year has been to work out what TCF means for them and what action they need to take.
While each firm needs to figure out its own particular approach, there are a few things all companies should consider.
Firstly, a lot of emphasis has to be placed on putting the customer at the heart of the business.
The old saying "treat your customers the way you would like to be treated" is a good rule of thumb.
It is also important to understand that customer satisfaction is not necessarily the same thing as treating customers fairly, because satisfied customer may still have been treated unfairly. "There is a clear distinction between nice and fair," Williams points out.
Complaints
Secondly, businesses also have to ensure that the TCF concept is not just partially taken on board, but that it is embedded throughout the whole product development process - from product design and marketing and promotion to the sales and advice process and the after-sales care, including complaints handling.
Williams explains: "Manufacturers cannot just pass on a product to a distribution channel and then forget about it - they all have to communicate with each other."
The distribution channel advisers should also try to steer clear of is to give advice about products that they are not specialised in, argues Lakey.
He says: "If you really want to treat your customers fairly you should only advise them on things that you are an expert in - an adviser should either try to become a specialist in one area or leave it."
As an example, Lakey mentions a case when a financial adviser gave advice to the readers of a national newspaper's cash clinic.
The adviser had suggested a critical illness insurance policy which, apart from the price, was very poor.
"The adviser must either have bashed it out on pure cost or they did not understand what they were selling," says Lakey, adding, "we must know our own limitations because good intentions can still lead to bad advice."
But what about firms that sell products without giving advice? Websites and supermarkets offering protection products via their direct sales forces have recently come under a lot of fire from various industry commentators. However, while their approach may not be applauded, surely they are still adhering to the FSA's TCF guidelines.
"Within the rules they are treating customer fairly because they are not giving advice but whether it is fair is another question. Since customers who buy protection policies directly lose the right to complain to the Ombudsman it suggests they are not TCF. So in terms of breaking the concept, yes they might be," says Lakey.
Taking it a step further, Linda Tyson, policy adviser at LifeSearch, a protection specialist which has been vocal in its criticism of non-advice sales, says: "To treat customers fairly those who sell without advice must ensure that their customers understand the limitations of the product available as they alone take responsibility for their buying decision.
"Having researched many non-advising websites over the last 12 months, in my view not one of them gives consumers enough information to make an informed decision as to their protection needs or how their rights are altered depending on the way they make this purchase."
Whether or not it is true that non-advice sales fail TCF, firms selling products direct without advice have to be very clear in their communications.
Over the past year most firms have tried to improve the way they treat customers. However, some firms are still failing to embrace the concept.
While it is unlikely that there are many firms that are actively seeking to treat their customer unfairly, with the FSA taking a tougher stance on firms not showing any evidence they are taking this seriously these businesses are likely to be in for a rough ride.
Sarah Wilson, FSA director responsible for TCF, heads a warning to firms that have been left behind. "You are increasingly being left behind by competitors who are finding commercial advantage in putting consumers at their heart of their business; you will also find that the FSA has less and less patience with inactivity and starts to consider greater use of enforcement action."
The regulator has made it clear that if a company hasn't taken TCF on board, there will be repercussions, something that Guardian Assurance and Guardian Linked Life Assurance found out in January when it was fined £750,000 for failing to treat its customers fairly.
The fine was for serious systematic flaws in its mortgage endowment complaints handling procedures and for not drawing the problems to the FSA's attention.
"Guardian failed to treat its customers fairly by exposing those with a valid complaint to the risk that their complaint could be rejected inappropriately.
"Consequently, they may not have received the compensation to which they were entitled," says Margaret Cole, director of enforcement at the FSA.
Hurdle
Looking ahead, there is still a lot more to be done over the next 12 months before the TCF concept is fully embraced by businesses.
One big hurdle is the current remuneration system used by most firms. At present, the more policies an adviser sells, the bigger the paycheck. "They way people are rewarded needs to change if TCF is to become a reality," argues Williams.
There also needs to be changes to the way advisers are treated if the TCF concept is ever going to work, believes Lakey.
He explains: "Say, for example, that I am selling CI plans, who can visit my office and work out whether I am doing a good job or not? FSA officials may be able to have a look through my paperwork, but the question is, are they capable of saying, for example, 'that NU product does not look right for that client'? Only a specialist adviser could do that."
To meet the demands, he thinks the FSA needs to sharpen its skills. "That way, the regulator can truly measure whether IFAs are treating their customers fairly," adds Lakey.
Whether or not this will happen remains to be seen but until then, it is up to advisers to make sure they are treating their customers as fairly as possible.
