An introduction to treating customers fairly
In May 2010 the Financial Services Board (FSB) issued a discussion paper titled Treating Customers Fairly (TCF). This document was commissioned subsequent to the FSB and the regulatory authority in the non-banking financial services industry deciding to pursue a TCF programme similar to that currently being implemented in the UK (since 2001). What does TCF entail?
Nobody is better positioned to answer the question than Dr Penelope Hawkins, managing director of Feasibility (Pty) Ltd, who was commissioned to prepare the report. Her 78-page discussion paper examines the elements of the UK TCF programme and considers its application in South Africa. Hawkins presented Introduction to TCF at a recent Masthead professional development day held in Johannesburg. The following is the first part of her comprehensive assessment of the new regulations.
What is TCF
“TCF is a new approach to regulating market conduct in the financial services industry that is based on outcomes rather than the outdated system of looking at rules and regulations,” said Hawkins. She told a joke which accurately reflects the “outcomes” concept:
Two individuals are standing at the pearly gates waiting to get into heaven. “Who do we have here?” asks St Peter of the first. “I’m Joe Cohen – New York stockbroker,” replies the man. St Peter nods approvingly, and gives Joe a silk gown and a key to the VIP section in heave. Seeing this treatment the second man in line can’t believe his luck. He steps up to St Peter and announced. “I’m John Baker – I’ve been the pastor at St Mary’s Church for 43-years.”
St Peter looks at his list and smiles. Yes – you’ve cracked the nod too. He gives John an ordinary hemp gown and access to the ‘common’ areas. John couldn’t contain his disappointment. “Hold on,” he objected. “I’ve given my life to the cloth. Why is Joe getting five-star treatment?” To which St Peter replied: “We work on outcomes here – while you preached people slept – while Joe worked people prayed!”
Why TCF is necessary?
TCF was introduced in the UK due in part to the failure of existing consumer protection legislations. Hawkins observes: “You can have leather bound regulation books stacked up to the ceiling, but still not achieve the outcomes you expect!” Regulators in that country decided it would be better to look at “outcomes” – the culture they wanted to instil in the industry as a whole – than making hundreds of new rules to plug the gaps in existing regulation. TCF is thus an attempt to change behaviours among all stakeholders in the financial services industry. Product providers, financial services providers and intermediaries must “treat customers fairly” in everything they do!
Unpacking TCF as it applies to the product life cycle
TCF must become an integral part of the culture at each and every financial institution, driven from the highest level. The easiest way to implement the TCF culture will be to at every stage of the product life cycle. Hawkins elaborated by considering the following six stages:
Stage 1: New product design
“We would like development of products that takes into account the needs and requirements of consumers, and designs products based specifically on them,” said Hawkins. The unfortunate “we have a product, now let’s see who we can sell it to” strategy must be replaced by a process of identifying target groups and developing products capable of satisfying their needs, and then selling it on to them. Hawkins mentioned long lists of exclusions in healthcare insurance products and high fees in products marketed to low income earners as examples of produce design defeating consumer objectives.
Stage 2: The promotion of service in the product
Do consumers understand product disclosures? You can tell a low value client about the impact of fees over time, but they often have no clue what you’re talking about. The communication breakdown between product provider and consumers is beautifully encapsulated in a recent survey of US-based mortgage holders. Just prior to the sub-prime crisis a group of 800 new home buyers were asked to explain, among other things, the difference between fixed and variable interest rates – almost half had no clue! “Simply disclosing is not good enough,” said Hawkins. She said the use of misleading statements, selective disclosures and information packs “post-premium” simply wouldn’t fly in a TCF environment. Product providers and intermediaries will have to assess whether a product is appropriate for each client. After all, what good is a tax-free investment to a poor person?
Stage 3: Advice
The FAIS Act and Codes of Good Conduct are examples of the rules based systems discussed in the opening paragraphs. In future financial services intermediaries will have to balance the commercial objective of increasing sales with the objectives of TCF. Your challenge has been – and always will be – to match the specific needs of your client with an appropriate product.
Stage 4: Point-of-sale activities
“Unless one spends time with the consumer at the point of sale they don’t understand what they’ve bought,” observed Hawkins. She shared an example from Namibia, in which an insurance company selling short-term and credit life insurance products achieved a claims ratio of 7% over a number of years. This statistic should send alarm bells ringing – because consumers buying from this company clearly have no concept of what they’re buying, specifically with regards their claims entitlements.
Stage 5: Information after the point of sale
It’s imperative for continuous advice to be given. Product providers that “cut” intermediaries who don’t write enough new business might have to seriously reconsider this practice. Notwithstanding, TCF hopes to introduce ongoing interaction between the industry and the consumer. “Very often consumers don’t understand the consequence of their behaviour after purchase,” noted Hawkins. She believes the industry will reduce lapses and surrenders if they address consumer misunderstandings about products.
Stage 6: Complaints and claims handling
Fair treatment requires that you honour any representation, assurance and promise that leads to a legitimate customer expectation. The debate under this point centres on the interpretation of legitimate! This stage will prove critical in “back testing” the TCF implementation. A detailed study of individual complaints or claims processes will quickly provide clues as to which product life cycle stage is malfunctioning.
The initial reaction to TCF has been to shout: “But we’ve already made rules!” Although this observation is accurate the idea behind TCF is to change business culture – so that the decisions from the top down are made with the customer in mind.
Editor’s thoughts: The shift from rules-based to outcomes-based regulation is a massive one. We can only hope the regulators apply their outcomes model more effectively than the failed outcomes based education (OBE) model foisted on South Africa’s learners recently. Do you think outcomes-based enforcement is suitable for our financial services landscape? Add your comment below, or send it to gareth@fanews.co.za
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