The concept of ‘Treating Customers Fairly’ (TCF) when selling financial services products is one that 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.
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Section five of that Act dealt with the protection of consumers namely:
- Principle five – a firm must pay due regard to the interests of customers and treat them fairly.
- Principle seven – a firm must pay due regard to the information needs of its clients and communicate to them in a way that is clear, fair and not misleading.
- Principle eight – a firm must manage conflicts of interests fairly.
In a 2001 paper the Financial Services Authority (FSA), which was formally established by the Financial Services and Markets Act, attempted to explain fairness. It 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.
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Customers must continue to take responsibility for their own decisions. Little was made of this obfuscation at the time, but it has now come to be seen as one of the major headaches for mortgage and other financial firms. The problem with TCF is that it is ill-defined or not defined at all. There is talk about giving the customer 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, 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 fined for non-compliance?
Falling foul
Many firms, believing themselves to be operating in a compliant manner, have suddenly and unexpectedly found themselves to have fallen foul of the FSA in relation to TCF. Smaller firms in particular have struggled to make sense of the new rules. TCF breaches now feature in 40 per cent of all fines imposed by the FSA, up from just 11 per cent of fines in the previous year, according to research by City law firm Reynolds Porter Chamberlain. Furthermore, the number of financial penalty notices handed out by the FSA has risen by 58 per cent to 30 cases during the last year to March 31 2007 from 19 cases in the previous year.
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 focuses 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 and outcomes and the FSA feels that this new environment will foster a more innovative and competitive financial services industry.
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While there are many benefits to this, there are also a number of challenges. Not least ensuring that the whole TCF concept is not too vague. The FSA is relying on firms accurately interpreting what it is the regulator expects of them. This makes operating a successful regulatory regime even more 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’. To ensure rapid engagement, the FSA 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.
Meeting obligations
Firms need help to meet their obligations. The FSA has said it will expand the range of TCF online tools and begin the roll-out 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.
It’s tough for the regulator to find a balance between prescriptive regulation and more flexible principles based approach. If firms do wrong, they can’t complain if they are fined. But when you are unaware of what the rules are it is easy to make a mistake. Hard evidence, in the form of TCF management information, which is embedded in the business, is now essential. But with the FSA themselves having stated ‘TCF is a cultural issue’, what hard evidence can firms realistically be expected to provide?
The FSA has made it clear that it 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 product providers alike.
