Treating Customers Fairly Lessons from the UK including FSA and FOS

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Treating Customers FairlyLessons from the UK
including FSA and FOS Ombud Rulings and how
Advisors are Managing the ProcessPhil
BillinghamACII CFP Chartered Financial Planner
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A brief history of UK Regulation

• 1988 Polarisation Independent or Tied
• 1990 Training and Competence rules
• 1995 Hard disclosure of Commission
• 1997 Minimum qualifications imposed
• 2003 Depolarisation but has no real
  effect
• 2006 The TCF journey starts
• 2007 The RDR journey starts
• 2012 Level 4 Qualifications are mandatory
  for all
• 2013 Advisor Charging rules come into
  effect
• 2013 Independent and Restricted models in
  place

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The Six TCF Outcomes

• Outcome 1
• Customers are confident they are dealing with
  firms where TCF is central to the corporate
  culture
• Outcome 2
• Products/services are designed to meet the needs
  of identified consumer groups and targeted
  accordingly
• Outcome 3
• Consumers are provided with clear information and
  kept appropriately informed before, during and
  after point of sale

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The Six TCF Outcomes

• Outcome 4
• Where consumers receive advice, is it suitable
  and does it take account of their circumstances
• Outcome 5
• Consumers are provided with products that perform
  as firms have led them to expect and is the
  associated service of an acceptable standard and
  as they expect
• Outcome 6
• Unreasonable post-sale barriers imposed by firms
  when consumers want to change product, switch
  provider, submit a claim or make a complaint

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The Regulatory Drivers

• After 24 years of Direct Regulation, the UK
  Regulators (FSA) view is that
• Many Consumers get an Unfair outcome but
  dont complain
• That there are still many complaints going to the
  FOS Ombud that should never do so, and are
  then upheld
• That a significant amount of written business is
  Compliant but Cp
• Their choices were
• Prescriptive regulation
• Principle based regulation TCF

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The Consumers view

• That much of their interaction with Financial
  Services is unfair
• They feel they do not win whatever happens
• This is a function of disparity of information
  as much as anything
• More experience of Advice lessens this view of
  Financial Services
• The commission system generates distrust
• Even when we think we have disclosed fully
• They dont understand why we win, whilst their
  investment fall
• Charges have risen overall in the last decade

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The Consumers view

• What is Fair?
• Never lose money?
• Always get ahead of the Market?
• Or that the outcome / behavior of the fund /
  product is in line with expectations?

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Is Fair the same as Equal?

• There is nothing so Unequal as the equal
  treatment of Unequal's
• Ken Blanchard the One Minute Manager meets the
  Monkey

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Our Evolving Interaction with Consumers

• Caveat Emptor Buyer Beware
• Dont sign unless you (think) you understand it
• Clarity of disclosure and education of the client
• Patronizing the top down approach
• Trust me I know what is best for you
• Do you really want all this paperwork?
• Informed Consent the role of the Trusted /
  Fiduciary Adviser
• Products and services are DESIGNED to be Fair
  for those clients
• Working WITH the client seeing the world
  through their eyes

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Recap on TCF The UK Experience

• The FSA sees TCF as a pioneering example of the
  move towards more principles-based regulation
• TCF is about placing responsibility on firms'
  management to deliver fair outcomes for consumers
  whilst offering you the flexibility to deliver
  these outcomes in the way which best suits your
  business.

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Effect on Firms

• Culture and language
• More Client focussed
• TCF is everyday language
• Assumptions
• Satisfied and Fair are not the same
• Someone else will judge Fair
• Business Planning and Marketing
• Be in business on purpose
• Know who your clients are
• Know where you add value and where you dont

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Effect on Firms

• Risk
• Risk is not just volatility
• Informed consent engage the client in the
  process
• Costs
• Many funds have high costs which degrade
  returns
• These costs are not always transparent or
  fully declared
• Due Diligence
• Not to justify a sale.
• . . . But to protect clients from Toxic
  products

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Risk Tolerance the normal distribution pattern
(Source FinaMetrica)
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The Adviser View of Risk v Reward
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The theoretical view of Risk v Reward
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The Clients experience of Risk v Reward?
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Impacts on UK market

• Remuneration
• Standard commission on all products usually
  by levelling down
• The move to an Adviser Charging model
  Because Im worth it
• Separation of Advice from Implementation and
  Review now more common
• Client segmentation and propositions
• Clarity of service written promises about
  delivery
• Care needed about the interaction of
  increasing costs and limited capacity
• Marketing
• Increased clarity of target market and product
  / service
• Niche is critical an Avatar approach

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Impacts on UK market

• Management Controls and Business information
• What gets Measured gets Managed
• Complaints / FOS
• Goalkeeper / Fullback function
• TCF is used as a touchstone
• Product design
• Bells / Whistles are what every marketer
  wants
• . . . but do they add value?
• Confusion marketing?

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Whats happening in the Market?

• Greater complexity of products
• Asset Classes / Construction
• Jurisdictions
• Increased separation of Production and
  Liabilities
• Increased debate about
• Role of Providers
• Investment process and costs Passive v Active,
  for example
• Chasing returns in a low inflation environment?
• Are clients lifestyles now our main competition?
• Do we pander to clients in the words of Lord
  Turner or educate them just say NO?

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The (official) stance of the UK Ombudsman

• How are ombudsman service decisions affected
  by the FSAs treating customers fairly
  programme?
• The ombudsman service decides, in the
  circumstances of a particular complaint, whether
  an individual consumer has been treated fairly
  taking into account the law, relevant rules and
  good industry practice.
• The FSAs treating customers fairly programme
  encourages the senior management of an
  FSA-regulated firm to create systems that support
  fair treatment of all customers. But it does not
  impose any new rules.
• So treating customers fairly should improve the
  way businesses treat their customers. But it does
  not affect how we decide individual complaints.

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Implementation

• Create a TCF Policy Statement (with Advisers
  and Staff)
• carry out TCF Gap Analysis and feed into a TCF
  Plan
• Measure progress against the Plan
• Gain feedback from management, advisers, staff
  and customers in respect of the key aspects
  of TCF
• Document these findings
• Modify your TCF Plan.

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Measuring Customer Outcomes

• MI is the key factor in securing and monitoring
  TCF progress
• TCF should not require creation of substantial
  new MI
• But it may!
• Senior management should be assessing and
  reviewing their MI to ensure the customer
  outcomes are being met
• Client Satisfaction can be a useful input
  but be careful!
• This is a continuous process it is not
  something you put in place then forget about

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Key Drivers Management Controls

• Are you aware of how your customers are being
  treated?
• Or at least how they feel they are being
  treated?
• Do you have a robust monitoring process?
• Do you have relevant controls in place?
• Is your MI relevant and being used in real life
  to measure whether fair treatment of customers
  is taking place?
• Are you reviewing the controls you have in place
  to ensure they are relevant?

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Strategies used to Implement TCF

• Gap analysis
• What does Good look like?
• Where are we now?
• What are the steps on the way?
• MI and Benchmarking
• What gets measured, gets managed
• Are we really as good as we think we are?
• What makes our firm special?

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An SA Insiders view of costs TCF?
Although the Financial Services Boards Treating
Customers Fairly programme is a step in the right
direction, Ntis concern that it will not be
far-reaching enough is a real one, because
serious profits are made from product design and
the industry will not walk away from them easily.
As one industry insider said If one day South
Africans woke up and saw a fully transparent
financial services industry, they would scream.
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An SA insiders view of Costs TCF?
The fees on this product, which is created
through an endowment structure, essentially
result in the underlying investment having to
perform at about 11 just to match a cash return
after costs.
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An SA insiders view of Outcomes TCF?
One can tick all the boxes as having followed
the process for giving advice as defined in the
Act, but still end up with shocking advice.
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Where are we?

• Client needs have remained the same . . .
• . . . But the potential solutions have become
  more complicated
• This requires a proper TCF led process
• Client take on
• Planning and analysis
• Due Diligence
• Implementation
• On-going reviews

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Conclusion

1. TCF is coming the timeline is set out
2. This will have an affect on your business and
   process
3. Risk and cost to consumers is a critical part of
   the process
4. Remuneration policy will be one of biggest
   drivers for change and remuneration structures
   will change think this through
5. Target Markets and Client Segmentation are key to
   understanding Client Expectations
6. You will need a project plan

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