Why ‘Treating Customers Fairly’ should be ‘business as usual’
David Whitely of the Financial Services Authority gives the background to the authority’s Treating Customers Fairly initiative and how it should be embedded in the culture and practices of financial institutions.
It may seem odd that the Financial Services Authority has a Treating Customers Fairly project as the principle that firms should treat their customers fairly isn’t new in the financial services, or any other, market.
Our TCF work is based on the powers that we draw from the Financial Services and Markets Act 2000 the legislation which underpins our work.
The principle of TCF is not drawn from the Act itself but is one of the principles for businesses that we established under the rulemaking powers that it provides.
In some areas, the principle is supported by detailed rules for instance, those governing the conduct of business for investments, general insurance and mortgages.
The objective of the Financial Services Authority’s Treating Customers Fairly (TCF) initiative is to ensure that customers’ best interests are embedded throughout any financial services firm’s business practices, and make TCF ‘business as usual’. The industry certainly takes this initiative seriously.
A recent survey of 55 representatives of investment banks, retail banks, broker-dealers, fund managers, general and life insurance companies, mortgage companies, energy firms, law firms, regulators and trade associations found that TCF was their biggest current regulatory concern.
How do we define TCF?
The senior managements of almost all retail firms would regard as obvious that they should treat customers fairly because this is just good business sense, but TCF is not about simply being nice to customers.
What it means in practice and how to achieve it is a decision for individual firms and their management to make, taking into account factors such as the structure of the firm, its operations, strategy and customer base.
In examining what TCF means in practice for firms, it is useful to look at what TCF is not.
TCF does not mean:
Being ‘nice’ to customers or creating satisfied customers.
All firms are required to offer the same, or highest, levels of service.
Inhibiting innovation in new products.
A firm must design or market different products for each individual customer.
We will be an arbiter of what products consumers should want or be sold.
Customers are no longer expected to take decisions or to take responsibility for them.
TCF is not intended to create new rules or obligations for firms, nor is it about creating checklists for firms to comply with.
It is not a process intended to lead to a continuous ratcheting up of standards across all firms, nor one intended to make all firms match best practice.
Firms need to be able to explain how they have assured themselves that the way their business is organized treats their customers fairly.
Where there are shortfalls, firms will be expected to show how they are going to address them, but the FSA does not use TCF to seek to continually raise standards where the firm has demonstrated that it is already treating its customers fairly.
TCF is not about making firms adopt the same or bureaucratic processes, as making detailed rules to apply to all industry sectors and all types of firm would restrict the freedom of firms to decide what TCF means for their business.
Nonetheless, we do recognize the need to help develop a common understanding of what TCF means in practice.
What do customers want?
The FSA’s ultimate objective is to deliver a better environment for consumers. So, we decided it was important to be able to take account of consumers’ views in our TCF work to help us identify priorities and conducted some research into consumer attitudes on fairness.
The sampling captured a range of views that we think are broadly representative of typical consumers.
Participants were encouraged to discuss their general views and experiences of fairness in their dealings with firms, as well as specific issues relating to financial services and products.
The findings showed that respondents found it difficult to distinguish fairness from issues such as ethics, customer service and genuine errors.
They therefore tended to regard any instances where things did not go to plan whether as result of poor customer service, a mistake or even rudeness as being unfair.
Nevertheless, the findings provided a useful insight into consumers’ attitudes to fairness in financial services.
The researchers worked with the respondents to seek to establish a definition of fairness, from a consumer perspective, and to identify what is important in their dealings with financial services organizations.
They guided and challenged respondents to help them distinguish issues about the consequences of mistakes from those they felt to be fundamentally unfair.
Despite the variety of views, when it came to identifying some basic principles that they regarded as being central to fairness, there was considerable consensus among respondents.
Six key themes for financial services firms emerge from the findings of the research programme on consumers’ perspective of fairness (in no particular order)
Give the customer what they have paid for.
Do not take advantage of the customer.
Offer the customer the best product you can.
Do your best to resolve mistakes as quickly as possible.
Show flexibility, empathy and consideration towards customers.
Exhibit clarity in all customer dealings.
These conclusions were consistent with our approach to TCF, and other initiatives on our retail agenda, including the development of the National Strategy for Financial Capability.
How can firms ensure they treat their customers fairly?
Some of the specific concerns raised by the research included a concern that they were not able to understand some of the complex features of products. They also felt that the way that financial products and services are advertised and marketed is unnecessarily complicated.
The research suggested, as a result, consumers are inclined to feel that there is no point in them attempting to
understand the products they are buying. Many of the respondents said that they wanted to be more engaged, but for that to happen, they needed firms to present information to them in a way that they could understand.
To address such issues, using the life cycle of a financial product as a guide, the FSA has identified some of the key activities in firms which can threaten the fair treatment of customers, including:
Product design.
Marketing practices.
The sales process (including advice where that is given and the information provided to consumers as part of the sales process).
Information and customer support after the point of sale.
Complaint handling.
Put in its simplest form, some examples of how firms could build TCF into their business include: stress-testing new products from the customer’s point of view; putting additional effort into communicating the risks and benefits of new products clearly; using after-sale surveys to test whether consumers have really understood what they have bought; and handling any complaints fairly and appropriately should they arise.
TCF is a priority for the FSA, and while we are encouraged by the steps many have taken, the industry needs to recognize that, beyond efforts made to date, there is more it needs to do.
To be clear, the steps we expect firms to take include:
Defining what TCF means for their business.
A gap analysis of their capability.
An action plan.
Defining accountabilities.
Setting appropriate measures.
Implementing the plan.
Monitoring and acting on delivery against it.
At this stage, we do not expect to find all firms having fully embedded TCF throughout their business, but, when our supervisors come to discuss TCF with them, we would expect to find that they have started to question or re-question what TCF means for their business, and started to analyze how they will ensure delivery of it and over what period.
The FSA’s priority is to get the senior managements of firms from across the spectrum to accept their responsibility for their firm’s delivery of TCF.
By this I mean management taking leadership in their firms, ensuring they drive the organization to think through how to ensure TCF is built consistently into its operating model and leads to real fair outcomes for customers, and creating and sustaining a culture that supports this.
David Whitely works at the Financial Services Authority. There is more information for firms and TCF on the FSA website at: http://www.fsa.gov.uk/tcf