The treating customers fairly evolution
As stakeholders in the financial services industry fine tune their operations manuals to accommodate Solvency Assessment and Management (SAM) and the new Binder Regulations (to name a few) the Regulators are already putting the finishing touches on the ne
Treasury’s plan hinges on the adoption of a Twin Peaks model of financial services regulation with the South African Reserve Bank in charge of prudential matters and the Financial Services Board (FSB) overseeing market conduct regulation. As such the Treating Customers Fairly (TCF) regime is a key component of the FSB’s enhanced market conduct mandate. “The new market conduct regulator will extend to banking sector transaction too, so that the banks’ conduct will finally fall under scrutiny,” says Gerry Anderson, Deputy Registrar: Financial Services Providers at the FSB. We spent some time with Anderson and Leanne Jackson, Head: Treating Customers Fairly to find out more about the TCF evolution.
The best of international policy development
One of the criticisms levelled at the FSB is that TCF, which is largely copied from the UK-based Financial Services Authority (FSA) regulation of the same name, is too UK-centric. Jackson dismisses these ‘copying’ concerns out of hand. “Just because we borrowed six statements from the FSA does not mean that we have branded the overall TCF solution the same,” she says. Increasingly all international standards bodies are introducing similar rules and regulations, so some overlap is inevitable. To what extent TCF mirrors the UK regulation is largely moot… Of greater significance are the reasons and motivation for the intervention.
TCF is necessary because there is an asymmetry of information between retail financial consumers and financial firms... As a result consumers are often uncertain of the unique risks in the financial products and services sold to them. One way to address these shortcomings is through a holistic and consistent financial consumer protection regulatory framework. “TCF is an outcomes-based regulatory approach that seeks to ensure that specific, clearly articulated fairness outcomes for financial services consumers are demonstrably delivered by financial institutions,” says Jackson.
Some early challenges
The six TCF outcomes have been well documented [readers can view them here]. Instead of revisiting the outcomes, Jackson provides a concise explanation of what the Regulator expects from financial services stakeholders: “These outcomes are to be demonstrably delivered throughout the product lifecycle, from product design and promotion, through advice and servicing, to complaints and claims handling – and throughout the product value chain”.
We will spend the next paragraphs examining some of the challenges the FSB and industry stakeholders face as the TCF implementation continues apace. An early difficulty was the definition of ‘customer’. Jackson points out that the regulation applies to all customers, whether institutions or individuals, because all customers deserve fair treatment. However, the emphasis will be on the protection of ordinary retail consumers…
A far greater concern is how to address structural challenges when implementing a new and untested principles-based regime. “As part of the roll out of TCF we are conducting a Gap Analysis of all existing legislation that deals with consumer protection and financial services providers – including general legislation,” says Jackson. Each of these laws must then be ‘measured’ against the six TCF outcomes. The analysis will identify significant inconsistencies between the various pieces of legislation as well as identify gaps between the existing legislative framework and the framework required to deliver on the outcomes.
“The intention is not to legislate retrospectively,” adds Jackson. “However, fair treatment should apply as much to your existing customer base as to new customers”. She suggests that companies should, at the very least, be conducting a review of their existing products, business models and practices to identify any risk to TCF outcomes. “Once such risks are identified companies should engage with the Regulator in terms of what can be done to address them – we encourage a proactive and pre-emptive process,” she says.
TCF must be embedded in the corporate culture…“We will look to firms to demonstrate that from board level down ownership is taken for TCF, direction given and delivery monitored,” says Jackson. “You cannot possibly make TCF the responsibility of a compliance officer – its implementation cannot be treated as a compliance function”.
Ironing out the remaining creases
There are a number of areas that need ironing out. Top among these is how to allocate TCF responsibility between wholesaler and retailer (for example binder relationships in the insurance space) and manufacturer and distributor (or product provider and intermediary). Jackson says that product providers cannot simply wash their hands of any responsibility for what happens in the distribution stage, nor can intermediaries assume the products they are marketing comply.
Another major stumbling block is how to ensure TCF delivery for bundled products, loyalty arrangements and add-on services. Work is also being done on the regulatory expectations regarding TCF management information… Financial services providers will have to figure out how to both measure and report on the regime’s outcomes.
Getting it done by 2014
A great deal of progress has already been made and it is hoped the implementation of TCF can begin in early 2014. Twenty organisations covering some 200 FSB licences participated in a TCF Self-Assessment Pilot during the first half of 2011. The FSB published the results from this pilot in December last year in which it summarised key findings, identified risks and highlighted good practice. A final Self-Assessment Tool is now available on the FSB website, though this tool should be used as guidance only – it is not a compliance check list.
Aside from a TCF Benchmarking exercise that will be done with selected firms – and the results published – the next step is for the Regulator to complete its Gap analysis and finalise the regulations in line with the overarching regulatory framework. The FSB is also internally reviewing its supervisory approach to tie in with the broader Twin Peaks requirements. “We are still hoping that we can target 2014 for TCF implementation,” concludes Jackson. She adds that the FSB has enough powers under current legislation to enforce the policy – meaning that the TCF outcomes could be practically enforced even if new regulations are not forthcoming by then.
Editor’s thoughts: The six outcomes of TCF are fairly straightforward. And financial services intermediaries are largely in line with TCF thanks to the FAIS Act. It will be a case of business as usual for the brokers and intermediaries in the trenches of financial services advice because TCF will not affect the requirement that you give fit and proper advice, including due diligence on all providers and product. Are you ready for Treating Customers Fairly? Please add your comment or send it to gareth@fanews.co.za
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