Treating Customers Fairly
INSURANCE TIMES - 15TH NOVEMBER 2007
I see that the FSA has decided to add yet another ingredient to its already distasteful Treating Customers Fairly (TCF) recipe.
It has published a consultation paper proposing to reform the rules in carrying out general insurance business. For business such as household, motor or pet policies, this means moving to principles and high-level rules, except where detailed provisions are required by European Union Directives or in a small number of cases where they are the only practicable way to protect consumers. While saying this will mean more flexibility for firms, the FSA will require the same standards of conduct and essential consumer safeguards to remain.
For protection products, the FSA is proposing a small number of additional rules carefully targeted to improve selling practices in areas where consumers are losing out. Some of these new measures will apply to all protection products; for example, a new standard to ensure balanced oral disclosure to help consumers make informed purchasing decisions. One of these – a requirement for firms to provide information on price orally to the customer where a discussion takes place – will have particular impact on payment protection insurance markets.
Dan Waters, FSA director retail policy, said: “It is right we should now move to a differentiated and principles-based regime for general insurance where the focus is on outcomes for consumers rather than processes within firms.”
There is one crucial thing wrong with all this. Intermediaries are already confused as to what TCF means and these rules changes will only further cloud the picture.
Treating Customers Fairly was welcomed by both the general public and the vast majority of firms when it was introduced as one of the tenets of the 2000 Financial Services and Markets Act.
However, a 2001 FSA paper concluded that fairness is a flexible concept that could not and should not be defined. Importantly, it also declared that fairness is flexible, contextual and not necessarily one-sided. Customers must continue to take responsibility for their own decisions. Little was made of this at the time, but it has now come to be seen as one of the major headaches for mortgage and other financial firms.
In December 2006, the FSA announced plans to move to a more principles-based approach to regulation and in April this year issued a handbook; entitled ‘Principles-based Regulation – Focusing on the Outcomes that Matter’. The Handbook and the FSA’s approach to supervision now focused on principles and outcome-focused thinking, rather than detailed, prescriptive rules prescribing how outcomes must be achieved.
This means that firms have much more flexibility in how they achieve their objectives/outcomes and the FSA feels that this new environment will foster a more innovative and competitive financial services industry. While there are many benefits to this, there are also a number of challenges. Not least ensuring that the whole TCF concept does not unfairly impact on the intermediary market.
The FSA is relying on firms accurately interpreting what it is the regulator expects of them. This makes operating a successful regulatory regime difficult for both the FSA and those firms regulated by them.
Especially since the closest the FSA has come to a definition of fairness is a list of “broad themes”. The regulator is concerned at the slow progress some firms have made in embracing the tenets of TCF. It has announced a new deadline for all firms to have completed their work on TCF and be able to demonstrate that they are consistently treating their customers. That deadline is the end of December 2008.
The problem with TCF is that it is ill-defined, or not defined at all. There is woolly talk about giving customers what they have paid for, not taking advantage of the customer and offering the best product you can as well as ‘showing flexibility, empathy and consideration in dealing with customers’.
This is all well and good and a fine structure to work within. But how is it measured? Where does a broker struggling to do the best for his client suddenly fall over the edge of the TCF precipice and find themselves fiend for non-compliance? That is the scenario that is being played out across the country.
Many firms, believing themselves to be operating in a complaint manner, have suddenly and unexpectedly found to have falling foul of the FSA in relation to TCF. Worse still, those in receipt of the regulator’s wrath are not always the big boys, but smaller firms that have struggled to make sense of the new rules and have toiled to successfully incorporate them into their business models.
Treating customers fairly breaches now feature in 40% of all fines imposed by the FSA, up from just 11% of fines in the previous year, according to research by City law firm Reynolds Porter Chamberlain. Overall, the number of financial penalty notices handed out by the FSA has risen by 58% to 30% during the last year (to 31st March 2007) from 19 cases in the previous year. It is clear that firms need help to meet their obligations and fining them will only divert resources away from dealing with the regulatory issues with which they are currently struggling.
The FSA has said it will expand the range of TCF online tools and begin the rollout of regional workshops in an effort to help small firms meet their obligations.
However, it has also warned that in future small firms can expect even more focus on TCF in their dealings with the FSA. Hard evidence, in the form of TCF management information, which is embedded in the business, is now essential. But with the FSA having stated that “TCF is a cultural issue” what hard evidence can firms realistically be expected to provide? And how much evidence is enough?
The FSA has made it clear that they will not issue detailed guidance in this area, so the firms themselves need to decide what it is the regulator needs to see. This is a most unsatisfactory state of affairs and leads to confusion among intermediaries and customers alike.
