Customer care

By the end of December 2008, firms authorised by the UK Financial Services Authority (FSA) are expected to be able to demonstrate to themselves and the FSA that they are consistently treating their customers fairly (TCF). While there is still confusion at some firms about what the concept of TCF actually requires, the FSA is clear that firms that fail to meet the deadline on time will, ultimately, be considered for investigation and enforcement action.

Although TCF simply sounds like a commonsense requirement, being able to demonstrate that it has been embraced by a firm to the FSA's standards is a regulatory requirement that authorised firms, their senior management and their compliance staff cannot afford to ignore. This view is reinforced by the FSA's TCF Progress Update of June 30, 2008, which suggested that approximately 20% of the relationship-managed firms in the FSA's sample would not meet the FSA's TCF requirements by December 2008.

What is TCF?

In line with the FSA's move to principles-based regulation, the TCF initiative is based on outcomes rather than processes or prescriptive rules. The concept is echoed in the FSA's statutory objective of securing the appropriate degree of protection for consumers and in the Principles for Businesses set out in the FSA handbook (for example, Principle 6 states that "a firm must pay due regard to the interests of its customers and treat them fairly").

The TCF approach applies to all regulated firms operating in the retail financial services markets. It is wide enough to cover firms that do not have a direct relationship with end-customers, and firms that are not involved in every stage of the life cycle of a product.

TCF is therefore relevant to firms that have direct contact with individual investors, such as stockbrokers providing advice and portfolio management services, as well as firms whose actions have a material impact on outcomes for retail clients. This would include, for example, an investment manager for funds that are designed to end up in the retail market. It would not, however, include a hedge fund manager providing investment management services to a hedge fund.

To help firms understand what TCF means, the FSA has defined six consumer outcomes (the 'TCF Outcomes'), which outline what it wants to achieve for consumers. These outcomes relate to all aspects of the consumer 'experience', addressing how consumers should be treated during the pre-sale, sale and post-sale periods.

The TCF outcomes are set out below:

- Outcome 1: consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

- Outcome 2: products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

- Outcome 3: consumers are provided with clear information and kept appropriately informed before, during and after the point of sale.

- Outcome 4: where consumers receive advice, the advice is suitable and takes account of their circumstances.

- Outcome 5: consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.

- Outcome 6: consumers do not face unreasonable post-sale barriers, imposed by the firm, to changing product, switching provider, submitting a claim or making a complaint.

Practical implications

The practical implications of TCF vary widely according to the size and type of firm concerned. Large organisations that have direct regular contact with retail clients may already have appropriate systems, documentation and resources in place to be able to demonstrate that they are treating their customers fairly. However, other (perhaps smaller) firms that do not have such regular or direct contact with retail clients may struggle to understand how TCF applies to them and what action they should take to meet the FSA's expectations.

Whatever the situation, it is clear the FSA requires all retail firms to embed TCF into their culture. This means that, although the ultimate responsibility for delivering consumer outcomes rests with senior management, TCF is a concept all staff should be made aware of, understand and comply with. Also, because TCF is a principles-based initiative, the onus is very much on firms to decide what is fair in each particular set of circumstances.

Step 1 - testing

By now, all firms should have considered the six TCF outcomes listed above and decided which are relevant to the business they carry out.

Firms should then have decided what evidence they need to collect to demonstrate whether or not these outcomes are being achieved. This can be done using management information (MI) or other sources.

In this context, the FSA has stated that MI means almost any form of information that is collected during a period of business activity. It may be about customers, staff, calls, visits, meetings, sales or opinions and, importantly, includes both quantitative and qualitative data. However, good MI needs to be accurate, timely, relevant and specific. For example, collecting a record of the total overall number of products that have been sold over a given period of time does not provide sufficient information to management to enable them to decide whether any particular products are being mis-sold. Instead, sales figures must relate to each type of product and should (perhaps) be expressed in percentage terms.

In many firms, a large amount of MI will already exist, meaning there is no need to create additional documentation. However, for other firms, the creation of appropriate management information will necessitate a significant change to their operational activity. Firms were expected to have the appropriate MI in place by the end of March this year.

Step 2 - demonstration

Firms should now be working towards the FSA's second deadline of December 31, by which date firms should be able to demonstrate, to themselves and the FSA, that they are consistently treating their customers fairly and delivering consumer outcomes.

To do this, the FSA has stated it would expect firms to have two things in place:

(i) a 'standard' to assess what level of performance is required in each case; and

(ii) a 'result' against which firms can measure how they have performed against the standard.

The FSA suggests using red, amber and green indicators to do this - amber enabling a firm to act early to remedy a problem.

In terms of approach, the FSA has stated that it is not always looking for zero failure at firms, but it does expect high standards to be consistently delivered by the end of December.

Addressing deficiences

The FSA has said firms that fail to meet the 2008 deadlines will face more regulatory intervention, and that it will seek to increase penalties where enforcement action is taken.

The key message for firms that have identified deficiencies in their operations, therefore, is to start acting now in order to address them. They should begin by determining what approach or processes they need to adopt in order to implement TCF; communicating the relevant information to staff; and allocating resources and responsibilities to appropriate personnel in order to achieve suitable change. Training should also be provided if required.

Where a firm is unsure of its obligations, it should engage with its advisers and, if required, the FSA at an early stage to discuss any issues.

FSA progress update

On June 30, the FSA published an update on the progress firms have made against the March deadline. The report stated that, of a sample of 96 relationship-managed firms, only 13% of the sampled firms (which the FSA assessed) met the March deadline on time. The FSA stated, however, that it still expected approximately 80% of the sample to be capable of meeting the December deadline.

Conclusion

Given the fact that approximately 20% of the relationship-managed firms in the FSA's sample are not expected to be capable of meeting the December 2008 deadline, all firms operating in the retail financial services markets should be taking action now to integrate TCF into their businesses.

At the very least, firms should consider the FSA's examples of good and poor practices, measure these against their own practices and make changes where necessary. Firms should aim to have 'no serious failings' with regard to TCF by the end of December, and should be prepared to demonstrate to the FSA what steps they have taken to integrate TCF into their business.

- Tim Dolan is a financial services partner in Pinsent Masons' corporate group. He has previously worked at the FSA and advises clients on financial services regulation, including treating customers fairly requirements. Lisa Ordidge is a solicitor at Pinsent Masons.