How treating customers fairly became a festive season hit

Gareth Stokes, FAnews Online Editor

As editor of FAnews Online I receive dozens of invites to financial services presentations each year. These invites dry up as the festive season approaches… The reason – or so the thinking goes – is that everyone is either on leave or gearing up for the h

We hope to bring this seminar to Cape Town during March 2012, so if you interested please e-mail events@fanews.co.za to show your interest in attending.

Billingham believes that convergence is the buzzword of 21^st Century financial market regulation. "We're all going to the same place, but we're getting their in different ways," he said. There is no doubt the FSB is adopting best practice from the UK, Australia and other developed markets as they chart the way forward for South Africa. The first giant step for financial services intermediaries was the introduction of the Financial Advisory and Intermediary Services (FAIS) Act in 2004… Aside from various enhancements to the Codes of Conduct that go hand-in-hand with this legislation, TCF will be the next big thing!

Getting to grips with treating customers fairly

"The biggest single problem with TCF is the name," opined Billingham. An important step in getting to grips with the legislation is to understand exactly what is intended by it. At first glance the words "treating", "customers" and "fairly" can be misleading and ambiguous. Among the many difficulties is determining who the customer is… There are, after all, multiple "customers" among the stakeholders in the financial services sector. "Fairly" is singled out as an incredibly loaded word. "What is fair," mused Billingham, before concluding that the answer lay in adhering to the spirit and principles encapsulated in TCF.

At the heart of TCF are the six principles first espoused in the FSB TCF discussion document distributed in May 2010. The fairness outcomes (as applied to financial services customers) must be demonstrably delivered by all regulated financial institutions. They include:

· Outcome 1: Customers are confident that they are dealing with firms where the fair treatment of customers is central to the firm culture.
· Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly.
· Outcome 3: Customers are given clear information and are kept appropriately informed before, during and after the time of contracting.
· Outcome 4: Where customers receive advice, the advice is suitable and takes account of their circumstances.
· Outcome 5: Customers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect.
· Outcome 6: Customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.

The aim of TCF is for these fairness outcomes to manifest in financial services corporate culture at every organisational level, and at every stage of the product lifecycle. Billingham was quick to point out that TCF is not an endgame, but the start of a process. The UK is still hashing out the finer points of the policy seven years post-implementation. And South Africa will have a similar lengthy acclimatisation period.

The need for fair treatment

Why were the FSA (and the FSB in South Africa) so keen to add to the already heavy regulatory burden in the financial services space? "After 23 years of regulation the FSA view was that customers were still receiving an unfair deal," said Billingham. "If we had done as a profession what we said we would – perfect advice – products that do what they say – and the consumer had enjoyed fair outcomes for the last 20 years – then we wouldn't be where we are today!" In other words – the industry must move on from the position where consumers believe the advice process is inherently unfair! The need for TCF also stems from the abundance of technically correct (and compliant) advice which is still unfair. "As soon as we accept that this type of advice exists we gain a greater appreciation for what the regulator hopes to achieve by the latest legislation," Billingham said.

Poor customer experience extends beyond the intermediary distribution channel. It is clear from UK statistics that the adviser, who accounts for around 80% of financial services product distribution, only contributes to around 1.5% of complaints. Banks meanwhile, with a mere 20% of the distribution load, were responsible for 90% of post-sales disputes. One of the major requirements for a successful TCF implementation will be for organisations (product providers if you prefer) to be taken to task for their transgressions. Regulators considered two options to carve out a system where fair treatment was guaranteed...

The first option was to embark on a process of prescriptive legislation. In other words the regulator decides the exact (and appropriate) financial solution for your client based on a set of pre-determined parameters! This prescriptive approach is not plausible and would render a career in financial advice "null and void". It would also lead to an exodus of financial services providers to less regulated environments. The second option is to develop principle based regulation… TCF is principle based regulation in action!

Remuneration in the cross hairs...

South Africa's regulators have already created a basic framework for TCF. They have identified six outcomes which, once instilled in the culture of the financial services firm, should lead to fair treatment of customers. "The harsh truth is that the [current] commission system generates distrust – even when fully disclosed and completely ethical," said Billingham. That is why the discussion document immediately following TCF deals with defining the role of the intermediary and intermediary remuneration.

Editor's thoughts: Local financial services stakeholders have plenty of work to do if they hope to implement the Treating Customers Fairly legislation by 2014. The UK TCF experience will prove invaluable in guiding local firms through the process. Are you confident that the TCF concept translates from the UK financial services industry to our own? Add your comment below, or send it to gareth@fanews.co.za