Life itself might not be fair. However, mortgage firms will need to think of a better excuse than that if they are not enacting the Financial Services Authority’s (FSA) ‘Treating Customers Fairly’ (TCF) initiative, which is beginning to entwine itself around the central cannons of regulation and has become an increasingly important indicator of how compliantly financial services firms are operating.
TCF is not a new thing and has its roots in the FSA’s principles for business. Indeed, principle six states: “A firm must pay due regard to the interests of its customers and treat them fairly.” What has changed however, is the focus being put on TCF and the way in which firms have to implement it into their operational processes and culture.
By now senior management should have worked out exactly what TCF means in relation to their own businesses and examined exactly where changes need to be made and the kind of risks that are apparent. It is not simply about looking at the point-of-sale – it runs deeper and requires assessment of training and competence, remuneration, performance management, product design and marketing, after-sales information and complaints handling.
Fundamental changes
In many ways, implementing the TCF initiative for firms is like an individual trying to live life by the maxim, ‘do unto others as you would have done unto yourself’. At first it seems relatively straightforward, but the more one thinks about this principle, the more one realises it has implications in every single area of both our mental and physical behaviour. For each person to live in this way, central and fundamental changes will have to be made, and these will differ according to existing behaviour and circumstance.
TCF also requires changes that run to the very heart of firms’ operations, and the FSA now expects that there is an understanding of this and that changes are beginning to be enforced that will deliver the cultural and operational swing towards a market that places customers and their fair treatment at its very centre.
All aspects of lender and intermediary business will be looked at, from product design to complaints handling, and firms need to always be thinking of how their actions and processes can be interpreted in a TCF environment. Clearly there will be certain areas of the mortgage market that come in for closer scrutiny than others and these should be fairly apparent by now.
Higher risk propositions
Equity release, defined as a higher risk proposition, will see a lot of interest from the regulator, while self-certification is also likely to attract its fair share of attention. There has also been a lot of interest surrounding the sale of protection products and this is undoubtedly an area that will be homed in on by the regulator. This is not to say that mainstream mortgage providers and intermediaries can sit back and relax – far from it – but only that there will be certain areas of the market that demand attention because of the slightly higher risk they carry, the vulnerability of their target market and pre-existing issues.
But what will the FSA expect to see when it visits a firm? First and foremost an understanding of what TCF means, where it fits into the business’s processes and what is being done to make it a central issue culturally and operationally. In practical terms this will mean different things for different firms. Some firms, for example, have established what have been described as customer walkthroughs. This aims to give firms an understanding of the experience that customers have through the lifecycle of each of their products delivered through each of their distribution channels. The aim is to identify actual or possible unfairness to the client and then seek remedies to the problems. Not only is such a tangible measure a clear indication to the regulator of how TCF issues are being dealt with, but also a valuable research tool in developing the customer experience.
One size does not fit all when it comes to TCF and firms operate in different sections of the market using different models and dealing with different volumes. All of these factors will affect the type of activities they are undertaking in relation to TCF and the FSA is well aware of this. Indeed the regulator has clearly stated its intention to work further with smaller firms who may struggle to provide the resource of their larger competitors, and have self-assessment tools and training on offer to help.
Indeed for mortgage advisers and financial advisers, workshops entitled, ‘Treating Customers Fairly: understanding the FSA’s expectations’ are being held throughout May and June taking place in London, Leeds, Bristol, Manchester and Birmingham.
The idea is to help firms develop their understanding of TCF, equip them to assess progress within their own operations, recognise where gaps exist and how they might be filled, as well as giving them a better understanding of how and where the FSA will look to review their business.
Opportunity to shine
In trying to help firms understand where the FSA will be coming from in looking at the implementation of TCF, the regulator has also produced examples of key risks, indicators and questions it will be asking. The questions are not designed to trick or catch firms out, but rather act as an opportunity for firms to show off what they are doing in relation to TCF. Firms will be asked to explain their understanding of TCF from strategy planning, product design and promotion, to sales advice, claims handling and staff remuneration. They will then need to show how they have considered their actions in relation to TCF and what is in place to ensure fair treatment happens in practice and not merely in theory.
There are a number of firms in the mortgage market with little or no contact with the end consumer and, in delivering their products through intermediaries, some lenders may feel TCF does not apply to them as rigidly as others. They need to think again. The FSA has clearly stated that, while firms may not have a direct relationship with retail customers, they nevertheless bear the exact same obligation to ensure that what is being offered is fair in its design, delivery and substance.
Indeed, in not having an end relationship with the consumer, the FSA is likely to be even more scrupulous in assessing how a firm has targeted its market and the measures it has taken to ensure products are being delivered fairly, and that sufficient information is available to ensure a clear and informed sale of the product. Firms should be able to show how they agree responsibilities for fair treatment of clients with third parties and demonstrate how the relationship is monitored. They should also be able to explain TCF considerations that were taken in choosing to work with a third party and how they have fed into the remuneration arrangements in place.
Demonstrating progress
While the FSA expects firms to be introducing fundamental step changes to their operations, it is also aware that these will take time to feed through and become part of the fabric. However firms need to demonstrate the process is well under way. In terms of taking action against firms who cannot, the regulator has stated its willingness to work alongside and agree with firms a way of addressing shortfalls and how redress should be made to customers who have suffered. Where firms have not responded to problems that have been highlighted or have failed to look at TCF at all, then there is every likelihood that enforcement action will be taken whether through a monetary fine or a curtailment of business. However, so long as firms can show themselves to be working towards developing an effective TCF environment, the regulator has stated that it expects to be able to work through any problems that they may have, rather than having to resort to any kind of enforcement.
In time the regulator expects TCF to be second nature to firms and that customers themselves will be better placed to differentiate when they are, and are not, being treated fairly. As with so many market shifts, firms that take the principles on board early and engender them into their operations, will be best placed to take commercial advantage of the developing market environment in the years to come. Those that do not will find themselves struggling to catch up and, rather than being able to evolve their processes, will have to make large step changes to get back in line and risk losing focus on their commercial drive. A dangerous game to play in such a competitive market.
Tim Hague is director of BM Solutions
