Almost three out of five small firms have failed to meet the Financial Services Authority’s (FSA) March deadline to show they are well on their way to implementing ‘Treating Customers Fairly’ (TCF), the regulator’s new principles-based approach to financial services.
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A report published earlier this month by the FSA found that although the majority of bigger financial services firms are on track to embrace TCF, only 41 per cent of small firms have made satisfactory progress. As a result the FSA has set a new deadline for the end of 2008 for all firms to show they are consistently treating customers fairly, warning of tough action against those still failing to engage with TCF.
TCF applies to the entire UK financial services sector, so the findings regarding small firms do not necessarily just relate to mortgage brokers. In fact many smaller mortgage brokers claim they are still uncertain as to what changes they need to make to their businesses to comply with the demands of TCF, saying that the FSA has been slow in providing detail and support. This view seems to be supported by the FSA itself, which has promised that small firms can ‘expect even more focus on TCF in their dealings with the FSA’.
According to Bill Warren, director of Complete Loan and Mortgage Services, the FSA’s report may well have been misleading and would probably find a higher level of activity among small brokers if it repeated its visits now. Warren explains: “The timing of the FSA’s work was January, and although there had been a heck of a lot of publicity about it, small firms were hoping for more guidance from the FSA about what they had to do.
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“Small firms I had spoken to were saying: ‘We’re following the FSA’s rules and our clients are not complaining, so what else should we be doing?’ They understand the FSA’s outcomes for TCF, but they need more guidance on what they have to do to apply TCF to their businesses. The FSA is addressing that, so I think if you carried out the research again now you would have a much higher result among small firms.”
The ins and outs
TCF is an all-encompassing initiative that is designed to shift the culture of UK financial services away from simply selling products to consumers, to a situation where products and services are initially designed to meet the needs of customers and are subsequently sold and advised in such a way that consumers understand the products and their obligations in undertaking such a financial commitment.
Mortgage brokers argue that the demands of mortgage regulation and compliance procedures mean that they are already putting customers first. Warren agrees, saying: “The FSA does not realise that there is an educational need among brokers, so it comes as no huge surprise that the result among smaller firms was low.”
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Warren relates firsthand experience among Complete’s own broker partners. “We, as a network, have done a lot on TCF,” he says. “We got all our appointed representatives together and asked them to put together their own TCF plan, and many found it hard. This doesn’t mean they don’t understand what TCF means, but they’re struggling to turn it into anything meaningful to be implemented in their businesses.”
Warren believes that for the majority of intermediaries cracking TCF could simply be down to better record-keeping; showing an understanding of the principles of TCF, providing evidence of how they address those principles with customers, and then keeping records to back up what they have been doing.
For many smaller firms, particularly those that are directly authorised and do not have the support of a network, the problem is that they do not have a dedicated compliance function, so TCF becomes another part of an ever increasing administration burden. Warren explains: “Because smaller firms have no compliance resource it can be hard for them to get an overview of their businesses and see what they need to do. But there is advice available, from the FSA and the Association of Mortgage Intermediaries (AMI), as well as the networks.”
'No complaints' stance
There is a not a fundamental lack of willingness among intermediaries to embrace TCF. Warren explains: “I am sure the majority of brokers are onboard with TCF. There will still be those with their heads in the sand and I think many brokers are struggling to get away from the feeling that because they have had no complaints, then everything is okay.”
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This ‘no complaints’ stance is something that many brokers cite as the real acid test of their ability to treat customers fairly. What other industries, they ask, would be required to follow strict procedures to ensure customers got fair and transparent advice, and then be forced to undertake a whole other process to prove their consumers were happy?
Some brokers feel that TCF could be divisive, putting more pressure on already over-burdened smaller intermediaries. Rod Murdison, proprietor of Murdison and Browning, agrees, saying: “What I don’t like about TCF is the implication that we are not already treating our customers fairly. Can you imagine asking judges in a court of law, for example, to prove they are treating people fairly?”
Murdison is a member of the Sesame network and says that he is kept up-to-date on TCF and all other compliance issues via the network. He still feels, despite the support, that TCF is just more hassle to deal with. “It’s hard to think how many extra things we can do to show we are treating our customers fairly,” he says. “I give my clients a disclosure document, I keep a file for each client on my findings from the sourcing system, and I send them a letter outlining what product I recommend and why I have suggested it. What more can I do?
“If you did a cross-comparison between the mortgage sector and other industries to see what they do to ensure customer satisfaction – and if you were to apply our rules on TCF to those industries – there would come a point where it would be seen as farcical.”
Once again Murdison agrees with the basic intention of TCF, but he questions how it is implemented in the mortgage sector. He argues that the FSA should take a more pragmatic approach to TCF, focusing on industries where the level of risk to the consumer is much higher.
He explains: “TCF came about as the result of abuses by people selling pensions and investments and I understand that; the consumer’s money, their assets, are at risk. But I don’t get paid until my client gets the mortgage for their house, which is their asset, so I’m not ripping anyone off.
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“The fact of the matter is that brokers are of a different scale compared with bigger companies. As mortgage advisers, there is not the same type of advice being offered as compared with investment advisers, and there is not the same level of risk for borrowers.”
Murdison argues that reports and news stories such as those highlighting the FSA’s findings among small firms are actually detrimental to the large majority of brokers that continue to be responsible and respectable. He says: “TCF sometimes seems to be designed just to make work for the FSA and us. I sometimes wonder if it is secretly trying to get rid of us. I have not seen any evidence of the abuses that brokers have been accused of. As such, I don’t think TCF is helping the public.”
Terms of business
Danny Lovey, who operates as The Mortgage Practitioner, has drafted his own TCF procedures document setting out how the principles should be implemented and how customers should be treated. Although the document is primarily there for his own purposes and for the FSA, Lovey says he is also considering incorporating it in his terms of business documents for clients.
Lovey admits that not all small brokers will have followed his example because they just have not got to grips with TCF. This is partly because TCF is not a clear-cut set of rules like mortgage regulation. “I think it depends on whether they want to understand TCF or take the attitude that they must treat customers fairly, otherwise they would not come back,” he says. “With TCF, in many people’s minds it is ‘subjective’ rather that ‘definitive’. Because it can seem ‘woolly’, I think it has taken time for people to get their heads round it and with smaller firms you will not have a management compliance committee deciding what it means. It’s down to you.”
However Lovey believes that actually formalising a TCF approach should not be too difficult for most small firms because they are naturally practising the basic foundations of the initiative. He explains: “Firms must get focused on getting their heads around it and adopting appropriate procedures with documentation on being ‘seen to be done’. With the small firm, or particularly a sole trader, you tend to actually adopt TCF without necessarily realising it in FSA speak. So just think that you are a bigger firm and document your TCF procedures as if it were a blueprint for your employees to adopt.”
There is support available from the regulator and other trade bodies, as well as commercial training companies operating in the financial services sector. But is it enough? “I think it is,” Lovey says. “But you have to work at it. The FSA has produced fact sheets, self-assessment tools, notes on good and bad practice, case studies, free roadshows and workshops at £50 a time, which are within a smaller firm’s budget. AMI has also been good with its update notes on the subject.”
Progress
Announcing the progress that firms had made towards implementing TCF by its deadline, the FSA said that sufficient progress had been made by 93 per cent of major retail firms, 87 per cent of medium-sized retail firms, 74 per cent of wholesale firms where TCF was relevant, but only 41 per cent of small firms.
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Sarah Wilson, FSA director with responsibility for TCF, said the FSA was ‘encouraged that senior management in many firms are showing strong commitment to TCF and are rising to the challenge of a more principles-based approach to regulation’. She also warned that the regulator would intensify its supervisory focus on any firms failing to efficiently engage with TCF, threatening enforcement action if required.
Talking about small firms specifically, Wilson said: “Small firms have done less well and that’s disappointing. However, it is important to stress that while many didn’t meet the March target, it was not because they were disinterested but because they were being too slow. With small firms too, it doesn’t take them as long to go from slow to rapid progress so many of those firms which hadn’t shown sufficient progress should get up to speed fairly quickly.”
This view is echoed by research carried out by AMI among its membership, which found that 70 per cent of members were either implementing or on their way to embedding TCF in their business by the March deadline. AMI also agreed with Warren’s view that the FSA’s findings were probably not an accurate up-to-date picture of the current state of readiness among small firms, pointing out that the research was carried out three to four months ahead of the March deadline.
Tracey Mullins, director of public affairs at AMI, said the organisation was pleased that so many firms had met the deadline. But she admitted: “It is deeply disappointing that so many small mortgage advisers failed to meet the deadline and we will continue to help our members as best we can to improve this situation.”
She stressed that just because some small firms had failed to meet the deadline, it did not automatically mean that they were not treating their customers fairly. Mullins also cited findings from the National Audit Office that suggested that larger firms were more able to adopt principles-based regulation because they have a deeper relationship with the FSA and are better able to pose questions and seek clarification then small firms are. In turn, she welcomed the commitment from the FSA to strengthen its communications with small firms on how they can fully implement TCF.
It’s clear there is still some education to be done among small mortgage advisory firms on the subject of TCF, although intrinsically good firms should understand the principles of TCF because they are the same as the principles of good customer service, which have been in existence since the very beginning. It’s important to remember that the regulator has already said that if TCF is not embraced by the industry, then we will be likely to see a much harsher formal regulatory environment in its place.
