Friday, February 17, 2012

‘Fair treatment’ confusion

‘Fair treatment’ confusion
February 2012 By Bruce Cameron


Illustration: Colin Daniel

South Africa’s financial services companies may think they are treating you fairly, but research by the Financial Services Board (FSB) shows they are often way off the mark – even misunderstanding what it means to treat customers fairly and what it will take for them to deal with you properly.

Although most companies claim they are committed to treating you fairly, they often confuse fairness with customer satisfaction.

This is one of the conclusions reached by the FSB following a pilot project conducted as one of the first steps to implementing a new outcomes-based regulatory system for the financial services industry, Treating Customers Fairly (TCF).

Regulators around the world are moving towards regulatory systems that are based on principles, because the financial services industry is inclined to look for ways to get around regulatory systems that are based on specific rules, to the disadvantage of customers.

The 44-page analysis of the pilot project details many instances where the financial services industry will need to raise its game in order to demonstrate that it is treating you fairly.

But Leanne Jackson, the head of the TCF initiative at the FSB, says because TCF is still being rolled out and specific TCF-related legislation and regulations have not been developed, it is understandable that firms are still assessing the full impact of TCF and may not yet have detailed implementation plans in place.

The FSB is worried by the view expressed by a large number of the participants in the pilot project that their existing customer practices are largely aligned with TCF, and that the main impact of TCF will be to formalise their measurement and governance processes, Jackson says.

Although some companies have clearly made better progress than others, she says the FSB is concerned that companies may not yet fully appreciate the extent to which TCF may require new ways of thinking at all organisational levels, as well as real, practical changes in the way that their products, services and processes are designed.

The pilot project involved 20 financial services companies, which hold more than 200 different FSB licences. The companies voluntarily completed a comprehensive questionnaire designed to self-test their readiness to deliver the six outcomes of TCF (see “Project identifies where companies aren’t making the grade”, below).

Jackson says the FSB is pleased with the effort that the participating firms put into the exercise – “they clearly took the process seriously, providing detailed and considered feedback, and senior executives made themselves available for the in-depth follow-up interviews”.

Jackson says the study highlighted a number of issues. These include:

* The participants, virtually without exception, claimed that customer-centricity or customer value propositions are already an important part of their corporate values and strategies.

But almost all of the participants acknowledged that the self-assessment process highlighted that they still have work to do – in some cases, a lot of work – to embed TCF thinking consistently across their organisations.

* Company boards of directors, which the FSB considers to have a key role to play in creating a TCF culture, cannot yet be said to be providing specific leadership on customer treatment.

The FSB believes that for TCF to succeed, a culture of treating you fairly has to be created from the highest structures of financial services companies.

* The delivery of TCF outcomes is often inconsistent across the divisions of larger financial services groups, across different management levels, across different parts of the financial product life cycle, and even across product lines or distribution channels.

Jackson says the pilot project highlights that it is important for companies to have accurate management information systems (both quantitative and qualitative) in place, which will enable them to demonstrate and measure their success in achieving fair outcomes for their customers. Although most firms have many customer-related measures, the data are often not used effectively from the perspective of customer outcomes.

For example, measuring how many insurance claims are finalised within a targeted timeframe or how many queries a call centre agent handles a day does not necessarily provide a company’s leadership with insight into whether the claims or queries were handled fairly from the customer’s perspective.

* Many companies measure your level of satisfaction, rather than whether you receive fair treatment. These two concepts are not the same thing, Jackson says.

“A customer who does not complain has not necessarily been treated fairly, whereas a dissatisfied customer has not necessarily been treated unfairly.”

She says you may be impressed with effective sales and efficient administration – and hence express satisfaction – but if the product is mis-sold, fairness has not been achieved – and this is something of which you may become aware only in the future.

TCF will spread its wings more widely than current consumer protection legislation for the financial services industry, bringing the marketing of financial products, as well as the market conduct of banks, into the regulatory net.

Banks have so far managed to escape most of the market conduct legislation – the Financial Advisory and Intermediary Services Act does not apply to bank lending products.

Once TCF is in place, the wider financial services industry will have to demonstrate that it is behaving fairly when selling you a product or providing you with advice on a pro-duct, from the product development stage to dealing with your complaints and claims.

It is intended that TCF will be based on rules and principles, which will make it difficult for financial services companies to use armies of lawyers to find ways to get around the legislation.


The Treating Customers Fairly (TCF) self-assessment pilot project conducted by the Financial Services Board (FSB) focused on how the 20 organisations that volunteered for the project measured up against the six standards (outcomes) that the government hopes to achieve by introducing TCF.

The project identified a wide range of practices that will not meet the required outcomes of TCF. The practices on which attention will be focused are broken down into the six desired outcomes of TCF:

1. TCF requirement: You must be confident that you are dealing with a company where the fair treatment of customers is central to its culture.

The problems and risks to outcome one identified in the self-assessment pilot project include:

* The lack of appreciation by boards of directors and senior management of the strategic implications of TCF for costs, rewards and profitability in product design;

* The absence of leadership to drive TCF in companies;

* The inability to assess or provide appropriate evidence of how a firm is meeting its TCF obligations, especially where responsibilities for the customer’s end-experience are shared by different entities;

* Conflicts of interest between a company’s commitment to TCF and its other goals are not adequately identified, analysed or managed; and

* Some companies are just waiting passively for the TCF legislation.

2. TCF requirement: Products and services marketed and sold in the retail market must be designed to meet the needs of identified customer groups and must be sold to the correct customers.

The problems and risks to outcome two include:

* Products are sold to customers for whom they are unsuitable and not intended. Little feedback is obtained directly from customers when products are designed.

* Distribution channels or strategies may be inappropriate for products or the targeted customers, because the choice of distribution channel is not always considered together with the product design.

* The bundling of products and/or services or the offering of excessive incentives to customers leads to inappropriate or unnecessary sales. This includes things such as loyalty programmes where one product is dependent on another, and it is difficult to disentangle the products when a customer wants to withdraw from one of them. Some firms simply assume that loyalty or add-on benefits are always good for customers.

* The risk profile of a customer group does not match that of the product – not enough is done to check affordability and understanding.

* The product provider does not understand or monitor the risks of the product.

* Products are launched without appropriate after-sales support and service structures being put in place.

3. TCF requirement: You are given clear information and are kept appropriately informed before, during and after you contract for a financial service or product.

The problems and risks to outcome three include:

* Promotions are not clear or mislead consumers, and customers do not understand the product information aimed at them. There is a strong focus on legal and technical issues when signing off marketing material, with little actual customer testing.

* Customers do not receive the key information they need to make an informed decision about a product at the right time, or the essential information is not appropriately highlighted.

* Inadequate after-sale information is provided about the performance of a product, its risks and what after-sale services are available; or the information on what action is required from a customer is inadequate.

4. TCF requirement: The advice you receive must be suitable and take account of your circumstances.

The problems and risks to outcome four include:

* Product suppliers often do not satisfy themselves that the intermediaries with whom they contract understand the products they sell and on which they give advice. Where independent brokers are used, many product suppliers believe they have no responsibility at all in this regard, and it is enough if the broker is licensed in terms of the Financial Advisory and Intermediary Services (FAIS) Act.

* Sales incentives and targets skew the quality of advice – advisers take more account of the commissions they will earn than the best interests of customers. Many firms simply say they comply with commission and FAIS Act regulations, and need not do more.

5. TCF requirement: You are provided with products that perform as companies have led you to expect, and the associated service is of an acceptable standard and what you were led to expect.

The problems and risks to outcome five include:

* Employees of financial services companies do not understand their obligations towards customers in relation to TCF. Some companies incorrectly believe that outcome five is relevant for investment products only. There is often little monitoring of functions, including customer treatment, outsourced to third parties.

* Monitoring of the impact of changes in the wider environment is done from a company perspective, not from the perspective of how they will affect the customer; or no action is taken to mitigate risks when such changes occur. The changes could be in things such as the tax environment, with the result that a product may not perform as expected. Product provider reaction is often limited to dealing with individual complaints.

* Customers are not informed of the costs or risks of a certain action or non-action on their part, which could impact on their expectations being met.

* Customers are not informed of the options that are available to meet changes in their requirements during a product’s life cycle.

6. TCF requirement: You do not face unreasonable after-sale barriers to changing a product, switching a provider, submitting a claim or making a complaint.

The problems and risks to outcome six include:

* Customers’ reasonable service expectations are not met, with most information being provided when the product is sold;

* Products are unreasonably inflexible; and

* The complaints-handling process is unwieldy or is isolated from other parts of the value chain. The insistence by some firms that complaints must be in writing is potentially unfair to unsophisticated customers.


The Financial Services Board (FSB) has set 2014 as the target to complete the roll-out of the Treating Customers Fairly (TCF) regulatory regime.

But Leanne Jackson, the FSB’s head of the TCF initiative, says that, regardless of the scope or timing of future guidance about TCF, the FSB’s main expectation is that financial services companies should already demonstrate that they are delivering – or at least are making progress towards delivering – the six TCF outcomes.

“There is no reason, in the FSB’s view, for firms to delay taking steps towards ensuring their readiness to deliver these outcomes. The need to deliver these outcomes is in any event already implicit in a number of existing regulatory requirements,” she says.

The results of the FSB’s pilot project are being used to refine the TCF self-assessment tool, which will then be made available for general industry use.

Once the tool has been made generally available, the FSB will carry out a TCF “baseline” study, using a larger sample of companies, to benchmark the level of TCF delivery across the financial services industry.

A TCF regulatory framework steering committee, which has a number of work streams, is close to completing a detailed analysis of existing legislation, to identify gaps and inconsistencies in relation to the regulatory framework’s ability to deliver fair outcomes for customers.

This work will form part of the process of legislative changes proposed in the National Treasury’s “twin peaks” model for financial sector regulation, in terms of which the market conduct of most financial institutions will fall under one regulator. The implementation of TCF is a key component of the proposal.

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