Companies are still not satisfying the FSA's Treating Customers Fairly initiative. Lucy Quinton takes an in-depth look at what is expected of firms and where they are going wrong
The Financial Services Authority (FSA) has made Treating Customers Fairly (TCF) the bedrock of its regulatory regime and will be looking closely to ensure the industry is implementing TCF as part of its broad principles-based approach.
All firms should be delivering on the six consumer outcomes that the FSA has stipulated.
The six consumer outcomes should be endemic within corporate culture, marketing, consumer groups, consumer information, advised sales and products.
Angus Maciver, insurance business director at Prudential, says this is what companies should do naturally. "It is just good business and part of the deal with customers - doing the right thing for them and treating them fairly should result in healthier businesses in the long run," he adds.
However, while the principle seems like a good thing, when looking at the finer detail, there are clearly issues regarding the vagueness of the principles, such as the impact this has on businesses, because the FSA states that, when it goes into small firms, it expects businesses to be able to prove that they are treating customers fairly.
A feedback policy statement, issued by the FSA in the middle of last month, detailed a progress report on the findings of how the implementation of the principle is being received by firms. It states:"Insofar as issues and concerns were raised, many seem to stem not from any substantive disagreement with the statement, but from an over - or an under - interpretation of what we were requiring of firms."
It continues: "Some respondents seem to have interpreted our comments about what they "should" or "may" do in appropriate circumstances as stipulations of what they "must" do in all circumstances. Conversely, other respondents seem to have interpreted the statement as exhaustive of what they are expected to do. We also recognise that some of the language used in the statement needed clarification."
Some progress
According to another FSA progress report, published in May this year, many firms have already invested in changing the way they conduct their business to ensure that they are meeting requirements. A five-stage process has been encouraged by the FSA - awareness, strategy and planning, implementing, and embedding. The March deadline the FSA set, where all firms were to have completed the implementation stage of the process, has, according to the FSA, helped "to focus firms' efforts on TCF and generated momentum within the industry as a whole".
However, the FSA's report says that, following its assessment, a sizeable proportion of firms have failed to demonstrate that they are implementing the initiative. This means that senior management in these firms have failed to create and put into action a plan to meet an existing regulatory requirement. "They have failed to take sufficiently seriously the need to address TCF risks in their business," it adds.
This is certainly the case, according to Neil Walkling, head of compliance services at Sesame, who says: "Small adviser firms are certainly struggling." Not only does the FSA want the firms to ensure that they are complying with TCF but they also now have to prove it. This, he says, requires a change of mindset.
In order for it to become effective and for smaller adviser firms to actually put in the time and effort to do this, Walkling says there will be a war of attrition with the FSA and that it should publish punishments on other firms that have failed to comply in order to show how important it is to adhere.
Providers, however, do seem to largely mean well when trying to treat their customers fairly and, as Wendy Crawford, compliance and risk manager at Bright Grey, says: "At the heart of our business is a desire to do the right things right for customers and to deliver a consistent and dependable service." She also adds: "TCF should be so fundamental to good practice that it is a shame that the FSA has had to raise the initiative in the first place. A good business should have all the elements of TCF at its heart - it shouldn't need to be told to treat customers fairly, it should do it as a matter of course," she added.
The stage of showing the FSA proof of the pudding when it does spot-checks on firms takes on many facets according to different companies. Maciver says that, at Prudential, it has data around each of the principles. This includes examples such as surveys after telephone calls and after most sales, which give the provider a good idea that customers believe they are being treated fairly.
In addition, Maciver explains that regarding the six consumer outcomes mentioned earlier, the provider is always assessing these and identifying any areas where it can improve so that TCF is fully embedded in what Prudential does.
Another provider, LV=, also uses reports, records and data detailing its improvements in all areas covered by TCF, according to Vanessa Owen, head of technical services at LV=.
Interestingly, David Brunning, director at Brunning Newman Houghton, says he finds the FSA approach to TCF "quite surprising" overall because it does not actually require firms to offer the best service or the most friendly advice - we just have to tell the clients what we can do at the outset, agree their instructions and then deliver what we promise. He explains: "We don't have to offer an annual review, but if we do, then we have to deliver. We have gone through our service proposition very carefully, agreeing what we want to offer, what we can deliver, what we do not want to do, and how much we will charge. This is the deliverable and as long as we deliver, and can demonstrate to the FSA that we are delivering, then we are TCF."
However, while it may be surprising to some people, there will be confusion regarding TCF because, for many companies, it will be a foreign concept. "How can TCF apply in an industry with poorly qualified and ill-supported advisers that often have a financial incentive in giving advice that is not in the best interests of the client," Patrick Connolly, marketing and PR manager at Towry Law, asks.
It is a sad indictment of the industry that such an initiative is introduced and many companies are struggling to meet the objectives. This demonstrates how clients have been treated in the past, he explains.
With consumer confidence at an all-time low with the industry, the FSA's idea of issuing this principle will surely help inspire a greater sense of consumer confidence. "In the past, customers have not been treated fairly," Connolly says, adding that the industry suffers from poor qualification benchmarks, 'soft' commissions and incentives from product providers, lack of company infrastructure, compliance and technical resources and advisers being remunerated on the number of products they sell.
Consumer perspective
This industry, despite the obvious workload involved in compliance with the TCF principle, does appear to be in favour of such an initiative. As Owen explains: "The FSA's move towards principles-based regulation allows for more innovation within the industry. It has empowered companies to be able to set their own objectives and processes with the FSA's outcome as a goal."
However, what is important is that, while the FSA implements this principle across the industry, it maintains an element of fairness in order for it to be a success. As Walkling suggests, the FSA is certainly talking tougher, but the question as to whether it has the resources to back this up remains. The FSA seriously needs to ensure that while it is implementing this, it will take firm action against those firms that do not abide by the principle. Otherwise, a shambles will ensue with a divided industry - those that have bothered to ensure compliance and those that have taken a lackadaisical view. The FSA has to ensure it is taking this seriously by publicising punishments as otherwise small firms, to which time and cost lead to greater expense than larger firms, will not bother.
