Tools of the trade

Over half of small firms are yet to implement the treating customers fairly principle, but with another deadline looming and regulatory fines on the rise it is vital that they get their act together. Emily Perryman finds out how firms can meet the FSA’s requirements

Treating customers fairly (TCF) breaches now feature in 40% of fines imposed by the Financial Services Authority (FSA), according to recent research by law firm Reynolds Porter Chamberlain. Despite this, many small firms are failing to make sufficient progress in implementing the principle while others are simply turning a blind eye.

The FSA issued a deadline of March 31, 2007 for firms to have implemented the TCF principle in a substantial part of their business. But a recent telephone survey of 659 firms by the regulator found that just 41% of small retail firms had met the deadline. This included 52% of financial advisers and 45% of general insurance intermediaries. Firms were found to have inadequate complaint handling procedures, insufficient advice monitoring and a lack of appropriate processes to enable the firm’s management to satisfy themselves that they were treating customers fairly, for example through the use of records on advice given, products sold and complaints.

The regulator subsequently set two new deadlines, stating that by the end of March 2008 firms are expected to have appropriate management information or measures in place to test whether they are treating their customers fairly and by December 2008 all firms are expected to be able to demonstrate that they are consistently treating their customers fairly. The FSA said it was “concerned about the slow progress made by the small retail firms” and that the majority who missed the deadline did so because of “slow progress” rather than failing to engage with TCF at all.

Speaking at a conference for financial advisers recently, Stephen Bland, director of small firms at the FSA, warned that it was a misconception that small retail firms could escape the regulator’s attention.

“We are sending a very clear message that small retail firms are not under the radar. Our regulatory approach is based on giving help to firms who run their businesses while treating customers fairly and endeavouring to do the right thing, but coming down hard on those who don’t,” said Bland.

What is TCF?

The FSA does not give a definition of fairness, but it says that TCF is about placing responsibility on a firm’s management, rather than its compliance officers, to deliver fair outcomes for consumers “whilst offering you the flexibility to deliver these outcomes in the way which best suits your business”. It is something that needs to be included in all relevant business decisions going forward and be regularly reviewed.

“TCF is wider than compliance with our rules. Rules cannot cover every possible situation so it is about firms working within the spirit of the rules and asking themselves whether compliance with specific rules is always sufficient to deliver the fair treatment of customers,” says the regulator.

Andy Milburn, IFA market manager at progress from Royal Liver, an insurer, says TCF is not about being nice to customers, nor is it about improving customer satisfaction. Neither is it about requiring all firms to offer the same levels of service, nor is it about inventing checklists for firms to comply with. Instead, it is about providing training for staff that ensures the quality of advice, making sure the customer gets the right advice and product, and putting things right if they go wrong.

Implementing the principle

In its discussion paper on TCF last year – The responsibilities of providers and distributors for the fair treatment of customers – the FSA said that a distributor’s primary responsibility is to ensure the customer has the information they need, that the product is suitable for the customer and post-sale service meets any expectations created.

To ensure this is happening in practice, the regulator says firms must take an objective look at the way they do business and ensure they can describe how TCF fits into their business and how behaviour within the firm takes account of the needs, acceptance of risk, level of understanding and rights of the customers. Nick Reynolds, head of intermediary sales at Norwich Union Healthcare, says this means firms need to “go right back to the basics” and ensure that when they provide advice to their clients – whether it is face-to-face, through a website or by phone – it is clear and explicit.

“TCF is not something firms can take lightly. It has to appear in their training material, feature in the monthly team meetings and form part of the new staff induction. It must be embedded into the daily business,” says Reynolds.

Andrew Sandilands, compliance officer at international medical insurance provider InterGlobal, says intermediaries should start off by doing a survey of all their customers, which asks them how well the initial enquiry was handled, how they felt about the advice given and how well the renewals process was dealt with. If there are certain things that could be improved, advisers should then form an action plan address them.

For example, Neil Walkling, head of compliance services at Sesame, the financial adviser network, suggests advisers could try to manage customer expectations better when selling critical illness (CI) insurance.

“The problem with protection is that it is often a secondary purchase sold on the back of a mortgage. Advisers must therefore make sure they engage customers properly by taking them through the key features of what they have bought and explaining what they are covered for,” says Walkling.

If an intermediary is switching existing cover, then Walkling says they must show they are doing this in the customer’s best interests rather than for the purpose of getting extra commission. Other examples of complying with TCF include understanding the benefits of putting life cover into a trust and doing a proper fact-find when selling payment protection insurance (PPI) to ensure the client is eligible.

Peter Chadborn, principal at financial advisers CBK, says it is also important to demonstrate that the firm is keeping up to date with industry developments. When the Association of British Insurers (ABI) introduced its new CI definitions, Chadborn ensured that the information was circulated to everyone in the firm, who had to sign and date it to prove they understood the changes.

Similarly, when pension term assurance (PTA) with tax relief was introduced, the firm used research from industry analyst Defaqto to draw up a shortlist of providers that met the firm’s standards of placing quality over price. It then circulated this among its advisers to ensure everyone was using the same information and customers were getting the best advice.

The ABI has produced TCF guidance which explains what advisers and insurers need to consider during the four stages in the lifecycle of a product: product design, marketing and promotion, sales and advice, and after-sales care. During the sales and advice process, it says advisers should consider issues such as: explaining the main features, benefits and restrictions of the product; ensuring the suitability of the product for the customer; identifying the needs and understanding of the customer; ensuring the customer understands their duty of disclosure; and assisting the customer in completing applications.

Headache or opportunity?

Robbie Constance, solicitor at Reynolds Porter Chamberlain, believes the TCF principle is far too vague and that by refusing to define or provide guidelines on how to implement it, the FSA “is causing a headache for firms”.

“This state of regulatory uncertainty makes it very costly for firms to attempt to comply,” says Constance. “TCF is also causing more problems for small financial services businesses; red tape always seems to fall most heavily on firms that can least afford it.”

Moreover, he says there are other problems associated with TCF from the point of view of the Financial Ombudsman Service (FOS).

“The FOS will decide whether companies have breached the TCF principle. But the FOS does not work as clearly as a court of law. There is still substantial uncertainty as to how they will deal with TCF,” says Constance.

But Emma Parker, a spokeswoman for the ombudsman, says the TCF principle will not change the way the FOS reaches its decisions. It will still look at whether a firm has acted fair and reasonably in all the circumstances, based on law and industry codes and guidance.

“TCF doesn’t change our decision-making but it will hopefully lead to fewer complaints in the long-run as it permeates from senior management throughout organisations,” adds Parker.

Chadborn believes that if firms look at TCF as a way of improving their processes and forming closer relationships with clients, rather than as something to comply with, they will find the principle easier to grasp.

Some adviser networks have TCF evaluation tools which look at everything from advertising through to complaints. Walking says that by using them advisers will come across things that they could do better.

“This not only helps you treat customers fairly, but also creates a more efficient business,” he adds.

TCF approach

Stage 1

Definition and awareness: bring TCF alive and make sure senior managers are on board

Stage 2

Identification and gap analysis: prioritise the key business procedures considered to be a risk to the fair treatment of customers

Stage 3

Planning and prioritising: analyse what needs to be done to fix any risks and draw up an action programme to deliver change

Stage 4

Implementation, monitoring and communication: create a framework with mechanisms to track progress, make changes, monitor outcomes, monitor delivery status, identify remedial actions and communicate progress

Source: progress from Royal Liver

The six TCF consumer outcomes

1 Consumers can be confident they are dealing with firms where the fair treatment of customers is central to the corporate culture

2 Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly

3 Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale

4 Where consumers receive advice, the advice is suitable and takes account of their circumstances

5 Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and also as they have been led to expect

6 Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint

Source: FSA

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