Treating customers fairly

April 2006

Treating Customers Fairly (TCF) remains a hot topic for the FSA and is something that all firms should ensure is properly embedded into the culture of the whole organisation to ensure that the requirements are properly met.

TCF is an FSA initiative that is aimed at ensuring that firms operate their businesses in a manner that ensures that their customers' best interests are taken care of. TCF does not involve following a specific set of rules or regulations and there is no specific definition. There are however common concepts in relation to TCF that apply whatever the size or nature of the business. These relate to the way in which business is done and are central to the firms' culture.

TCF is only one small part of the FSA's approach to its supervision of the retail markets, as a strand of the desired outcome of "Firms who treat their customers fairly, are soundly managed and adequately capitalised".

1. Management of Treating Customers Fairly

Culture, Senior Management and the Approach to TCF

A culture of TCF should be evident in all parts of a firm's business from Senior Management down. In developing a TCF regime throughout an organisation, Senior Management should take full ownership and responsibility to ensure that: -

• TCF is applied throughout the business in a manner that is appropriate for both the nature of the business and the customers; and
• TCF is firmly embedded in the firm's culture.

1.1 Consider what TCF means for the firm and how it applies to the business and its customers Senior Management should ensure that: -

• they have taken full responsibility and ownership for TCF;
• they are fully committed to, and understand, TCF within their business environment, and given their particular customer base;
• they have formed a view on the interpretation and application of TCF in relation to their business;
• sufficiently senior personnel have been appointed to manage TCF within the organisation;
• a strategy has been agreed and developed; and
• they retain oversight of the delivery of TCF.

1.2 Undertake a Gap Analysis
A business wide review of the firm should be undertaken to identify areas of risk to TCF, which should include a review of existing relevant management information as well as a review of additional material where necessary.

1.3 Prepare an Action Plan
A plan should then be put in place to address areas of concern both operationally, structurally to ensure that TCF is embedded in the culture of the business. This should include plans for ensuring the: -

• oversight of the program by Senior Management;
• implementation of action required to address concerns and embed TCF in the culture of the business;
• allocation of responsibilities;
• allocation of resources (people and financial);
• training of staff; and
• monitoring of progress.

1.4 Implement the Action Plan
Systems should be put in place to ensure that the plan is properly implemented at all levels from Senior Management down through the organisation. This should include ensuring that: -

• planned operational and structural changes have taken place and training has been delivered as necessary;
• management information is being used, and is capable of being used, to track the progress of the operational changes;
• reporting lines are put in place to ensure that those allocated responsibilities under the program are accountable; and
• mechanisms are in place to ensure that adequate oversight is provided by Senior Management for all of the above.

1.5 Consider and act on Feedback
Where feedback indicates that it is necessary mechanisms should be put in place: -

• for amendment of the plan, or any element of it; and
• for lessons learned to be communicated to relevant staff.

• that Senior Management need to be involved and should have ongoing oversight;
• that the concept needs to be firmly embedded in the culture of the business at all levels; and
• that TCF is not merely a box-ticking function that can be conducted by the compliance department; and
• the need to conduct a review of each particular business, its services and / or products and customer base is key, and as a result each firms interpretation of the requirements, and actions, will be unique to it.

2. Treating Customers Fairly

Having looked at the requirement for Senior Management involvement, and the structured process through which they must go, we must now look at what is meant by Treating Customers Fairly and where specific risk areas lie.

Common Concepts applicable to TCF

The core concepts that apply to TCF are ensuring that: -

• there is clarity of the offer;
• promises are delivered;
• an acceptable resolution is found when things go wrong;
• the customer is not taken advantage of for any reason; and
• services and / or products sold are suitable for the needs of the customer.

Risks to TCF
Risks to TCF arise at many stages of the life-cycle of a service and/or product sale, in the remuneration and reward systems applied for staff, in the firm's management information and in Senior Management failures.

These risks are assessed below. In accordance with the management requirements detailed above, the involvement of Senior Management in the assessment of these risks and the planning of remedial action where risks are identified as needing to be addressed is necessary.

2.1 Service and Product life-cycle
Several areas should be looked at to consider whether issues arise within the service and/or product life-cycle that may compromise the delivery of TCF by the firm.

Service and/or product design should ensure that: -

• services and/or products are suitable for the intended target audience;
• customers are given sufficient information in a suitable form to enable them to understand the service and / or product; and
• adequate monitoring of the service and / or product sale is undertaken.

Financial Promotions should: -

• be clear, fair and not misleading;
• target an appropriate customer base;
• be understandable; and
• ensure that all claims it makes are met in the service and / or product.

Sales advice - it should be ensured that those giving such advice should: -

• have sufficient expertise;
• provide clear and fair explanations; and
• not be influenced by their incentives and remuneration structure.

After sales processes should ensure that: -

• adequate monitoring is undertaken; and
• obligations are honoured.

Complaints procedures should be: -

• properly conducted;
• easy;
• consistent in their decisions; and
• ensure that root causes are addressed.

2.2 Culture and Rewards
Firms are urged to review the remuneration of staff and the firm's rewards structure because of the risk that the system may encourage the unfair treatment of customers - e.g. by the use of high pressure sales or the sale of unsuitable services and / or products. TCF should also be used as a performance measure. In addition, firms should look at their training and ensure that all staff are fully aware of their TCF responsibilities.

2.3 Management Information
A significant risk to TCF is a failure in the management information upon which the firm's TCF strategy is developed. Risks here include the failure to: -

• identify all the information requirements to enable Senior Management to assess the risks;
• distribute the information to all relevant personnel; and
• act on the management information.

2.4 Senior Management responsibility
The failure of Senior Management to: -

• take sufficient responsibility;
• to understand the strategy;
• to assess the manner in which a firm meets its obligations; or
• to track progress or implement remedial action where progress is not being made,

present a risk to TCF being embedded in the organisation. This is a general and overriding risk. Without the required commitment and actions of Senior Management TCF cannot be adequately embedded throughout the organisation.

3. What Treating Customers Fairly Is Not

Whilst it is difficult to define exactly what TCF is, there are many things that the FSA is clear about when explaining what TCF is not. Included in the list of things that TCF is not are: -

• being nice to customers or improving customer satisfaction;
• requiring all firms to offer the same or the very highest level of service;
• an inhibition on the design of new services and / or products;
• a requirement to design different services and / or products for different customers;
• a removal of the ultimate customer's responsibility for deciding what they should purchase. Provided that the services and/or products are properly targeted and marketed and the customer is provided with sufficient, understandable information, responsibility for the decision whether to purchase or not remains theirs; or
• any other increase in the standards of behaviour expected of firms

4. FSA's Supervisory Approach

The FSA has warned firms that TCF continues to be a priority and stated in its 2004/5 Business Plan that: -

• firms must give adequate priority to the fair treatment of their customers;
• TCF is a core part of Senior Management responsibility; and
• they will strengthen their focus on this aspect of firms' management controls so that it becomes a core aspect of their regular monitoring.

In addition, firms are reminded that: -

• TCF will be a key feature of ARROW 2 when it is rolled out next year;
• TCF will be looked at in relation to all the thematic work that is undertaken; and
• supervisory tools will be used where appropriate.

However, the FSA has indicated that: -

• it does not expect to see immediate change, but will expect only to see change over a reasonable period of time;
• it will help firms who are making a reasonable effort to address TCF issues.