Transcript Treating Customers Fairly

Treating Customers Fairly
Lessons from the UK including FSA and FOS –
Ombud – Rulings and how Advisors
are Managing the Process
Phil Billingham
ACII CFP Chartered Financial Planner
A brief history of UK Regulation
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1988
1990
1995
1997
2003
2006
2007
2012
2013
2013
Polarisation – Independent or Tied
Training and Competence rules
‘Hard’ disclosure of Commission
Minimum qualifications imposed
‘Depolarisation’ – but has no real effect
The TCF journey starts
The RDR journey starts
Level 4 Qualifications are mandatory for all
‘Advisor Charging’ rules come into effect
Independent and Restricted models in place
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The Six TCF Outcomes
 Outcome 1:
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Customers are confident they are dealing with firms where TCF is
central to the corporate culture
 Outcome 2:
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Products/services are designed to meet the needs of identified
consumer groups and targeted accordingly
 Outcome 3:
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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
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Where consumers receive advice, is it suitable and does it take
account of their circumstances
 Outcome 5:
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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:
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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:
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Many Consumers get an ‘Unfair’ outcome – but don’t 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 C**p’
 Their choices were:
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Prescriptive regulation
Principle based regulation – TCF
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The Consumers view
 That much of their interaction with Financial Services is unfair
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They feel they do not win whatever happens
 This is a function of disparity of information as much as
anything
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More experience of Advice lessens this view of Financial Services
 The commission system generates distrust
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Even when we think we have disclosed fully
 They don’t understand why ‘we’ win, whilst their investment
fall
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Charges have risen overall in the last decade
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The Consumers view
 What is Fair?
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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
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Don’t sign unless you (think) you understand it
Clarity of disclosure and education of the client
 Patronizing – the top down approach
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‘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
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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 don’t
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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)
Risk Group
Score Range
No. in Group
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0-24
1%
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25-34 35-44 45-54 55-64 65-74
6%
24% 38% 24%
6%
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75-100
1%
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The Adviser View of Risk v Reward
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The theoretical view of Risk v Reward
Equities
Managed
Fund
Bonds
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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 I’m 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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What’s happening in the Market?
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Greater complexity of products:
• Asset Classes / Construction
• Jurisdictions
Increased separation of Production and Liabilities
• Increased debate about:
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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 FSA’s
“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 FSA’s “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
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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
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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
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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 Board’s Treating Customers
Fairly programme is a step in the right direction, Nti’s 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?
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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
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TCF is coming – the timeline is set out
This will have an affect on your business and process
Risk and cost to consumers is a critical part of the process
Remuneration policy will be one of biggest drivers for change
and remuneration structures will change – think this through
Target Markets and Client Segmentation are key to
understanding ‘Client Expectations’
You will need a project plan
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