treating customers fairly – the countdown

The Financial Services Authority's (FSA) December deadline for treating customers fairly (TCF) is fast approaching and whilst many firms are aware of the deadline there is a feeling of concern as to whether they have done sufficient to satisfy the FSA's requirements.

By December 2008 all firms should be able to show that they are consistently applying TCF to their business and demonstrate that they are doing so using appropriate management information.

The difficulty that many firms face is how to show that they treat customers fairly and what management they should produce to demonstrate that they are doing so? How much management information should they produce? Does it need to be packaged up into a TCF bow? Particular difficulty is faced by firms who only have a small proportion of their business in the regulated sector for example, firms where insurance intermediary services are offered ancillary to the main business of the firm. The TCF requirements can appear to be onerous and in some cases, irrelevant.

what are the requirements?

TCF has been broken down into six consumer outcomes which cover every aspect of a firms business and also reflect the life cycle of products and services offered to customers.

• outcome one – consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture
• outcome two – products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly
• outcome three – consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale
• outcome four – where consumers receive advice, the advice is suitable and takes account of their circumstances
• outcome five – 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
• outcome six – consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

who are the consumers?

Consumer is an FSA defined term and includes individuals as well as legal persons with whom an FSA authorised firm deals in the course of its business. The consumer must either be acting outside of their trade, business or profession or has, is or is contemplating using the services offered by the authorised firm. Legal persons include bodies of persons corporate or unincorporated e.g a partnership or a limited company. Therefore firms need not only to consider their relationship with retail customers, but whether they have a relationship with firms where TCF should be considered. Eligible counterparties are not included within the definition of consumer.

TCF and management information – what should firms do?

What management information should firms produce to demonstrate each of these outcomes? We have provided some examples below. It is impossible to produce a definitive list as each firm will need to consider what is relevant taking into account the nature of its business, its size and structure.

The management information does not need to be labelled 'TCF' nor does it need to be produced specifically under the heading of 'TCF'. However, firms are required to demonstrate the appropriate elements of the six consumer outcomes, even if the management information is not structured in this way. Therefore firms will need to consider each of the outcomes in the context of their business and what information they currently produce, or information that they should produce to demonstrate each outcome.

outcome one - corporate culture. Firms need to be able to demonstrate that TCF forms part of their corporate culture. This means that TCF should be embedded in the firm at the top and passed down to staff. The sort of things that firms should consider are:

• the role of senior management – one message that has come from the FSA is that TCF should start at the top! Senior management should lead by example and have an active role in TCF. Management information produced in accordance with the Outcomes below should be considered by senior management (often in the form of a high level summary) and appropriate action taken in response where necessary. TCF should be a regular point for discussion at Board level and firms should keep a record of all executive communications on TCF
• reward/bonus schemes – firms should ensure that staff are incentivised to act in a manner that ensures customers are treated fairly. Consider whether sales volumes are the appropriate measure for staff or whether other qualitative measures are more appropriate. Where appropriate, staff objectives relating to TCF against which staff will be assessed and therefore it will form part of the formal appraisal process
• training and competence – TCF should form part of staff training, not necessarily as a stand alone topic but as part of the overall training provided. Staff should be aware of TCF and understand how it impacts on their role. New staff should have TCF as part of their induction programme. Ongoing monitoring of the numbers who fail the training / assessment
• use of staff surveys – perhaps a section dedicated to checking and understanding staff awareness and understanding of TCF issues also consider questions on how they view the firms treatment of its customer
• customer satisfaction surveys – seek feedback from customers as to their experience in purchasing the product. Perhaps include a free text box for customers to insert any comments they would like to feedback.
• internal audit – consider using internal audit to review business or specific areas where TCF will have an impact

Obviously the medium and larger firms are more likely to have the existing structure in place to identify what TCF means and produce the necessary management information. Smaller firms may struggle to meet the requirements – but with the FSA declaring its Enhanced Strategy for Small Firms, the regulatory focus will be on small firms and therefore the ostrich approach is not recommended.

Another issue is those firms where the majority of their business is not FSA regulated. Whilst the FSA cannot regulate the other parts of firms business, this creates an artificial distinction as it would be difficult to demonstrate corporate culture for its regulated business but have a different corporate culture in place for the rest of its business! Either senior management has embedded TCF as part of its corporate culture or it hasn't. The FSA has said that it does not consider it unreasonable for these firms to adopt outcome one across its business as it makes good business sense to do so. Many firms we have spoken to agree in principle but in reality find the requirements disproportionate to their business and they are often trying to fit a square peg into a round hole!

outcome two – product design. This outcome places responsibility on those who design products. Previously, where difficulties were found with products, the regulatory focus was placed on those with the direct relationship with the customer, often through the advisory process. This shifts the focus further up the chain and firms should consider whether they have in place the ability to produce management information covering the following areas:

• customer analysis and research – at the point of design firms should consider the customer profile of those to whom the product should be sold. Follow up research should be undertaken to assess whether the customers who have bought the product fit the customer profile identified at the outset. If there is a mismatch further consideration as to the reasons why should be undertaken
• sign off procedures on new products – who signs off new products? Could the process around sign off be enhanced?
• product volumes expectation – based on the customer profile firms should have some idea how many products they are going to sell. After a reasonable period firms should then review the number of actual sales against the projected volumes. Again this could produce information which requires further exploration
• customer/product retention – taking into account both of the above, firms should periodically review the numbers of retentions and cancellations. Where cancellations are higher than expected further information as to the reasons for cancellation should be undertaken
• Complaints analysis – a recurring theme throughout all the outcomes. What proportion of complaints indicate that there was a mismatch with the customer profile?

outcome three – information to customers. This outcome requires firms to ensure that customers are in possession of the all the relevant information necessary to enable them to make an informed decision prior to the point of sale. Information includes financial promotions, fey features documents and illustrations and policy documentation. Management information in relation to this outcome could include:

• obtaining customer feedback/customer testing. This could take the form of providing information to a sample group which should include customers which fit the product profile. Ask specific questions to assess their understanding of the risks and benefits of the product
• results of call / sales monitoring – reviewing monitoring of sales process
• results of quality sampling – file reviews to ensure that the relevant information is provided to customers prior to the point of sale. Review figures obtained
• mystery shopping – perhaps carried out in response to issues identified in relation to specific individuals / agents
• customer cancellations – review number of cancellations in cooling off period. Consider whether any issues or trends are identified
• customer survey – include questions on documentation provided

outcome four – advice. This is one of the most obvious customer facing functions as the customer will be dependent on the advice provided to them. Demonstrating suitability on an individual client level is something that firms are used to. However, firms need to take this a step further as it is important that firms can demonstrate that it undertakes monitoring of its staff to ensure that the standards are met. Management information relating to the advice process could include:

• training and competence – ongoing assessment of staff required and consideration of the results of the ongoing monitoring
• results of internal audit review of sales process – in the light of TCF this would be a good time to review the whole sales process
• compliance monitoring – firms should undertake adequate compliance monitoring. This could include regular sample file reviews. Where issues are found customers should be recontacted where appropriate. Consideration should be given to recurring trends or any training needs that are identified. Where problems are consistently identified in particular staff firms should consider whether the problem is a training need or an issue relating to competence
• call/sales monitoring – the results of this monitoring should also be considered as above to identify any individual concerns, trends or training needs. In relation to insurance sales – results of sampling checks to ensure that eligibility checks are being completed. Also consider what proportion of customer contact results in no insurance being taken out
• mystery shopping – consider results of the mystery shopping exercise against outputs
• cancellations – volume of cancellations in the cooling off period
• complaints analysis – are there a number of complaints about a particular sales person / outlet or recurring issues that need to be addressed?
• customer/product retention – consider this in light of the expectations identified earlier in the process
• customer feedback – seek feedback from customers. This can be done through a questionnaire once the product has been sold / contract concluded

outcome five – customer expectations. This outcome relates to whether the customers expectations have been met and many of the management information produced in relation to outcomes two to four above will be relevant. Firms could consider the following:

• complaints analysis – what are the key areas of complaint? Do they raise issues around the information / advice stage of the process?
• customer feedback - see above

outcome six – post sale barriers. Customers must not fact unreasonable post sale barriers. Firms are encouraged to maintain a high level of customer service after the point of sale. The sorts of management information that firms could be looking at includes:

• complaints analysis – numbers and reasons for complaints. Identify emerging issues/trends and take appropriate action in response. Are claims being dealt with in the timescales required by the FSA? Numbers of complaints referred to the Financial Ombudsman Scheme and proportion of claims upheld. Where claims are upheld does it indicate systemic issues that need to be addressed?
• claims – consider per centage of claims made and per centage where claim rejected. Also gather information for reasons where claims not being paid
• early redemption - how many products are cancelling the product before the end of the term and the reasons for the cancellation. Are customers taking out other products to replace the ones previously purchased or cancelled for other reasons?
• customer feedback – what is the customer's view of the post sale experience? where customers have made complaints, what was their view of the complaints process?

TCF – an FSA island?

Whilst the words treating customer fairly may not be the exact words used, the sentiments of increasing customer protection is spreading. This is supported by a growing amount of legislation which aims to ensure the fair treatment of customers which includes:

• Consumer Protection from Unfair Trading Regulations 2008
• The Consumer Credit Act 1974 (as amended 2006)
• The Consumer Protection (Distance Selling) Regulations 2000 (and 2005 amendment)
• The Unfair Terms In Consumer Contracts Regulations 1999 – more recently incorporated into the FSA Handbook "The Unfair Terms Regulatory Guide" (June 2008)

Many government agencies are also moving towards Principles based regulation shifting the onus onto firms to self manage and do the right thing. The Office of Fair Trading (OFT) published it's Enforcement Policy in November 2007 which made clear its intention to move towards Principles based regulation. The OFT will be asking the courts to consider the behaviour of firms and whether or not it is fair. Embedded within this is whether customers are being treated fairly.

Many trade associations also have codes which require their members to act fairly and reasonably in their dealings with other firms and with customers.

The FOS has always considered the fair treatment of customers, along with the law, relevant rules and good industry practice in determining the outcome of a complaint and has stated that whilst TCF should result in firms paying more attention to the interests of their customer it will not fundamentally alter the way in which it determines complaints.

TCF – what next?

TCF is a significant piece of work and firms will not only be visited to ensure compliance with the deadlines, but TCF will also be incorporated into ARROW II and the small firms enhanced strategy. Additionally, the FSA will also be undertaking thematic projects in key areas: mortgages/advice/insurance/investments/banking to assess whether consumers are being treated fairly. It will be interesting to see how the FSA will take TCF forward and the cases it considers appropriate to pursue through the enforcement process.

For further information please contact Kath Shimmin, head of Blake Lapthorn's Finance on kath.shimmin@bllaw.co.uk or call 023 8085 7081.