Broker versus mystery shopper?

24 May 2021 Gareth Stokes

The implementation and ongoing improvement of South Africa’s Conduct Standard for Banks will ensure that the principles of Treating Customers Fairly (TCF) are entrenched at every touchpoint between banks and their customers. Recent developments also provide insight into how the FSCA will achieve its market conduct mandate by ensuring TCF outcomes at insurers and other financial services providers (FSPs), including financial advisers and insurance brokers.

“We are mandated to protect financial services customers and ensure that they receive the treatment they deserve,” said Kedibone Dikokwe, Divisional Executive: Conduct of Business Supervision at the FSCA, during a media roundtable. The country’s banks have been subject to section 3, 4, 5 and 6 of the Conduct Standard since 1 March 2020 with section 7, 8, 9 and 10 in effect from 1 July 2021. 

Embedding TCF in organisational culture

The Conduct Standard for Banks, issued by the FSCA under section 106(1) of the Financial Sector Regulation Act, gives insight into how TCF principles are being integrated into the financial services environment. The FSCA, which has held a watching brief over the banking sector since the regulation was first published, shared some of its observations on the sector’s compliance efforts to date. “We have witnessed a significant shift in terms of the governance structures that exist within banks,” said Dikokwe. She noted that many banks were already including market conduct as part of their businesses and that market conduct was evolving from a tick box exercise to a process embedded in banks’ organisational cultures. 

Sindiswa Makhubalo, Head: Banks and Payment Provider Supervision at the FSCA, said there had been a big shift from a product-centric to customer-centric focus among banks: “Banks are changing their structures to ensure they are closer to their customers … they are [rethinking operational models to] drive customer outcomes instead of profit”. It would appear that bank customers are already benefitting from a range of positive spin-offs as banks adopt the Conduct Standard and take TCF principles to heart, with anecdotal evidence of downward pressure on bank fees during FY 2020 and 2021. 

“Banks [have gone out of their way] to accommodate financial services customers who have been negatively impacted by COVID-19,” said Dikokwe. Such fee concessions have become commonplace across a range of bank and bancassurance products. One example is that some banks have started adjusting the premiums on credit life policies to reflect reductions in their policyholders’ principal debt. “We have been in contact with some bank providers and are starting to see an adoption of lower premiums in line with reducing capital balances on customers’ accounts,” she said. 

Leaving no stone unturned…

It is important that financial services institutions review their customer interactions at every customer touchpoint. Large banks were commended for their ongoing initiatives to educate and inform their customers about the banks’ internal complaint processes. These initiatives include in-bank product brochures and videos that clearly outline the process for both internal and external complaint resolution. It is also worth noting that proactive compliance with market conduct regulation can give product providers and FSPs a significant edge over their competitors. An interrogation of existing business processes in the context of fair treatment outcomes will often reveal shortcomings in traditional ways of banking; fixing these shortcomings leads to competitive advantage. 

One of the issues mentioned by the FSCA is that banks’ legacy systems contribute to unnecessary frustration for customers. “We have been quite deliberate in our discussions with financial institutions insofar moving to a single view of their customers,” said Dikokwe. The long-term objective is that customers will not have to meet Know Your Customer (KYC) requirements at multiple divisions within a bank or even sister companies under the same diversified financial services brand. There are some drawbacks to the digital technology that is enabling banks to innovate in the administrative and operational spheres, namely the risk of isolating large swathes of the South African consumer community. Banks, insurers and other FSPs must therefore keep the regulator’s overarching financial inclusion objective in mind when migrating their administration, claims, distribution or underwriting processes to digital platforms. 

The FSCA acknowledged the ongoing shift from manual to digital processes; but warned banks not to leave vulnerable customers in the lurch. “South Africa is an unequal society in which most of our customers do not have access to the smart devices required to interact with new digitalised processes,” said Dikokwe. Consistency is the buzzword as banks seek optimal TCF outcomes whether they sell products via an adviser or digital channel and whether the end customer falls into a low or high income bracket. 

Are you ready to be ‘mystery shopped’?

Over the coming months and years FSPs will come to learn that much of the regulatory oversight function is being carried out by way of ‘mystery shopping’. The regulator is dedicating more and more human resource to review banks’ advertising campaigns and in-branch customer service. They are specifically keeping an eye out for misleading advertisements and making sure that product providers’ product terms and conditions are in line with how they are presented to customers, regardless of the distribution channel used. 

“We use ‘mystery shopping’ focused on branch networks, call centres and frontline distribution channels as one of our main supervisory tools,” said Makhubalo. The FSCA is visiting bank branches and telephoning bank call centres for a first-hand experience of service levels via these sales channels. They have already noted that call centres are challenged, having observed wide variations in response times and turnarounds. “We have kept banks busy by doing extensive walk throughs to understand their procedures and how they treat customers and we have identified and observed some profound changes that we felt are aligning to the emerging customer-centric culture,” said Makhubalo. There is no doubt the ‘mystery shopping’ tool will be used at other FSPs as the regulator introduces sectoral conduct standards and, eventually, implements and enforces the Conduct of Financial Institutions (COFI) Act. 

A hands-on approach to compliance and enforcement

The media round table, which left few doubts over the extent of future FSCA oversight of product providers and FSPs, mentioned some of the gaps that banks would have to ‘plug’ to ensure TCF outcomes. First on the list was the very topical issue of termination of customer relationships. “There is a gap here and we have held many conversations with industry to see what enhancements are needed to ensure that customers feel they have been fairly treated following a termination,” said Makhubalo. Banks were also encouraged to ensure financial inclusion when implementing digital solutions; to minimise platform downtime for all customers; to reduce fraudulent incidents; to charge equitable fees for similar banking services; and to find solutions for dormant accounts, among other issues. 

Writer’s thoughts:
The sense I got while listening to the regulator’s update on its implementation of the Conduct Standard for Banks is that the FSCA is becoming more prescriptive than ever insofar operational aspects of the institutions it supervises. Will your brokerage or financial advice practice withstand a future visit from an FSCA ‘mystery shopper’? And are you ready to work closely with the regulator to ensure your internal processes are up to the TCF code? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts


Added by Gareth Stokes, 24 May 2021
Thanks for the comment, André. Banks have done themselves few favours over the years... The FSCA mentioned a number of concerning TCF failings in the sector, most notably in the area of marketing (such as over-promising on product returns) and charging excessive fees.
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Added by Gareth Stokes, 24 May 2021
Indeed @Paul... Though it does seem more likely that FSPs will have to endure a raft of new compliance functions & reports in coming months & years. A possible consequence of the current regulatory approach is a financial services market dominated by large players; with smaller players slowly succumbing to the burden of over regulation.
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Added by Paul , 24 May 2021
Cant wait for deregulation, the colonic expulsion of unnecessary and destructive bureaucracy.

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Added by André, 24 May 2021
I fully agree with the focus on banks. My experience is that they treat customers as a necessary evil. Who has not been inconvenienced by having to wait at the bank for hours, often for them to correct their own mistakes?
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