To comply with the FSA's initiative to treat customers fairly the sale of protection policies must clearly identify clients' needs. Simon Burgess looks at how to get it right
Like a distant summer thunderstorm, the Financial Services Authority's (FSA) treating customers fairly (TCF) initiative has been rumbling in the background, without actually threatening more than a passing shower. However, as the clouds begin to gather on the horizon, there will be more for the protection market to worry about as we get into the tempestuous autumn and winter seasons.
By its own admission, the FSA has spent a good deal of time collecting information on the practicalities of TCF - how the industry should conduct itself in relation to its customers, and where improvements can be made. This work has been going on for a number of years and the watchdog is now harvesting the fruits of its labour.
Customer service
Earlier this summer the FSA released a research paper entitled: Treating Customers Fairly - Building on Progress. As the name suggests, it detailed TCF would contribute to the way firms in the sector were assessed and monitored by the regulator.
Expressing its intentions, the FSA said: "Having built up our practical understanding of TCF and its implications for firms across broad areas of the industry, we are now building TCF into supervisory work. We have started to assess how firms have considered TCF in the context of their business and the conclusions they have reached. Starting later this year, TCF will become a core part of our ARROW risk assessment process. Supervisors will, during risk assessments, identify what firms have done to assess what TCF means for their business and how they are addressing any shortfalls that have emerged."
No longer is TCF something to look out for on the horizon. It has arrived and those who fail to embrace it will be penalised. The question is how many firms really understand what TCF means in relation to their processes and products, and how many have begun to engender the cultural change in their organisations that the FSA is looking for.
Taking a look at the way advisers and agents are paid, there is little doubt that remuneration still generally depends on the volume of sales completed. The problem here is that advisers and providers may in some instance be putting clients under undue pressure, simply to make the sale and hit their targets.
Recently the London School of Economics undertook research into the need for mortgage payment protection insurance (MPPI). It found that somewhere in the region of 55% of all mortgage borrowers ought to have MPPI. However, according to the anecdotal sales targets bandied around the market, it would appear that some mortgage lenders are setting sales targets of selling MPPI with up to 75% of all new mortgages.
If these targets are hit it is reasonable to assume that a sizeable amount have been mis-sold. In the past many firms have been happy to simply watch the revenue flow in. In the terms of TCF such mis-selling will not be tolerated.
How many providers have changed the way they remunerate or reward their staff? How many providers and lenders have examined their relationship to ensure its success does not purely rely on the volume of sales made, but has wider considerations relating to the treatment of the end customer? How many providers and distributors have begun to look at ways of remunerating their sales forces without jeopardising the fairness with which their customers are treated?
Highlighting the risks in its Building on Progress paper, the FSA said: "Remuneration can be an important factor in achieving business objectives, but a failure to manage and control the risks inherent in particular remuneration structures can threaten a firm's ability to treat its customers fairly. A heavily commission-driven structure for sales staff, for example, can create risks, which need to be effectively managed."
Providers are unlikely to have to do away with commission structures for their sales forces, and where the remuneration is based on sales made in response to a clearly defined need, there is no need that they should. However, firms are going to have to demonstrate that they have established means to avoid the associated risks. To date, it is questionable how many have made such considerations and put such safety barriers in place.
As well as looking at the remuneration given to sales staff, the FSA will also pay close attention to the products themselves, the way they are distributed and the way they are marketed. Making sure that customers understand the product they are buying and that it meets their needs is core to the whole issue of TCF.
The information and marketing literature supplied by protection providers is often so poor that independent brokers create their own literature instead. If providers are unable to support the products they have on offer with clear and easily accessible literature that details the way the product works, the requisite criteria and any associated risks, how can they possibly claim to have the fair treatment of their clients embedded in their operational processes?
Information age
Regulated financial products can no longer be designed, distributed and sold with only the providers and advisers taken into consideration. Products must be designed with clients' needs in mind and stress testing done from their point of view. Target markets must be clearly identified and marketing literature designed to illuminate the products in question, rather than shrouding them in darkness. Again, this is not happening across the market, and while TCF may be on everybody's lips, the practicalities than it requires are not happening as a matter of course.
In discussing these issues the report put out by the FSA asks of insurance policies in general: "Are the policy conditions unnecessarily complex and therefore difficult for consumers to understand? Is the target market for the product clear, particularly for more complex products? Are the features of the product clearly and fairly reflected in the marketing material in a way that the targeted groups of consumers can understand? Can changes to products - for example limiting exclusions - help reduce the risk that some consumers may subsequently purchase inappropriate products?"
In areas of the protection market, specifically, both providers and advisers are failing to provide suitable answers to these issues. With something like mortgage payment protection insurance, for example, it would surely be fairer for the customer if products were, in the main, portable. Critical illness policies still have exclusions lurking in the shadows, and too often clauses surrounding pre-existing medical conditions that are not well-enough explained. Whether this is the fault of the provider's poor literature or the broker's poor sales process will vary from case to case, but where it surely must lead to customers not being treated fairly the FSA will be there to pick offenders up.
In too many instances protection policies are sold as ancillary products, with insufficient time spent identifying and assessing the client's needs. By selling in this way advisers and providers are failing to meet the requirements of the regulator, are unlikely to serve their customers as they should and will miss out in the long run on a valuable stream of revenue. TCF, and regulation more generally, has left many believing it will stifle their operations and curtail the business they do.
If, however, firms can identify the needs of their clients accurately and effectively and then offer products which meet them, there is no reason this should be the case. Products delivered in this way can only create a better relationship between the protection market and that can only be bene-ficial all round.
Many will feel they already do treat their customers fairly. The important point, however, is being able to prove it, so firms must put action behind any thought they have had on the matter. Product design and delivery will remain key to the FSA, but so too will the relationships that practitioners have in the market, how these are managed and how they affect the customer. As a market we need to have clear strategies in place to ensure we meet our obligations to both the regulator and our customers. Those who do will avoid being swamped by the brewing storm and create a better balanced business to take forward.
Simon Burgess is managing director of Burgesses
COVER notes
TCF is no longer something to look out for on the horizon. It has arrived and those who fail to embrace it will be penalised.
Making sure that customers understand the product they are buying and that it meets their needs is core to the whole issue of TCF.
Product design and delivery will remain key to the FSA, but so too will the relationships that practitioners have in the market, how these are managed and how they affect the customer.
