Over the coming months the FSA will be carrying out checks on how fairly you treat your customers. Steve Southall and Andy Mills explain what this means for your firm

reating customers fairly is high on the FSA's list of priorities. All regulated firms, brokers and insurers will need to comply with this. Over the coming months and into 2005, the FSA will be carrying out 'arrow' visits to assess firms' performance. The principle of treating customers fairly is the FSA's response to a clamour to "do something" to give consumers more protection, and although aimed across all sections of retail financial services, is an initiative which general insurers should not ignore. Certainly, it may serve to scotch any sense of contentment among those who feel they can put their feet up and relax once they are compliant with FSA rules. The challenge for all financial services companies is that in aiming to enforce the principle that firms should treat their customers fairly, the FSA has not provided any new rules to help define what this means. Without rules, it is difficult to know whether you are compliant, and it may be even more difficult to challenge the FSA if it deems that you're not. It may not be fair, but it will be up to providers and intermediaries to be able to provide evidence that they have not acted unfairly.

Plan your responseAll general insurance firms, large or small, must understand the implications of treating customers fairly and plan their response. 'Arrow' visits form an important part of the FSA's regulatory regime and firms selected for a visit in 2005 should be pre-pared to provide evidence that they treat customers fairly.Addressing the full list of issues thrown up by treating customers fairly is a significant undertaking – there is no single, one-size-fits-all answer. Central to any successful response is that it must be driven by senior management and based on a clear articulation of the business's overall strategy, including the target markets the firm is serving, the level of service it intends to offer, and the product range it supports. The FSA will expect senior management to demonstrate that they have put treating customers fairly into their business strategy and culture, that their business governance approach minimises the risk of customers being treated unfairly, and that management information and measures are available to assess its performance at treating customers fairly.The insurer/broker relationship will be an important area. Both will need to establish clearly what their customer responsibilities are versus their partners' in the supply-chain. Insurers are not exempt from treating customers fairly because they sell through intermediaries. They will be expected to ensure the target market for their products is clearly defined and communicated to distributors. Brokers may become more demanding in selecting product providers, paying closer attention, for example, to the quality of product training available and the clarity and balance of product literature provided. It will also be advisable for all parties to check that whomever they are doing business with manufactures, promotes or sells products in a manner consistent with treating customers fairly. The FSA is promising to reduce the regulatory burden on individual firms evidencing a strong culture of treating customers fairly, and if the financial services industry as a whole responds positively to the principle, there is the promise to look to streamline its rulebook.

Better relationsAs the precise requirements remain undefined, those that do take the lead and set an early benchmark for treating customers fairly are likely to establish a better relationship with the FSA. Indeed, in the short term it is likely the FSA will value constructive dialogue to help it shape its plans.For the general insurance industry, the challenges of the new regulatory world are only just beginning. Treating customers fairly is a regulatory issue that they must embrace. Like many drivers of change, a pro-active approach is likely to be beneficial. While it may force general insurers and intermediaries to answer some difficult questions, it will provide the opportunity to improve their relationship with both the regulator and customers. Regulation in general insurance has only just begun.' Steve Southall and Andy Mills are members of the Ernst & Young financial services regulatory practice.

The logic behind 'treating customers fairly'The rationale behind treating customers fairly is logical enough. Few would argue that customers should be treated unfairly. To most, it is reasonable that general insurance products should do what they say they will; that marketing and sales materials should be clearly written and understandable to those at whom they are aimed; and that the range of cover, and any exclusions, should be clear.Most insurers and brokers are likely to accept such sentiments as being entirely reasonable. Indeed, it represents good business practice that will hopefully lead to additional benefits such as higher customer satisfaction, improved loyalty and retention, more cross-selling, and increased word-of-mouth recommendation. Nonetheless, there are problems in the financial services industry as a whole, and the FSA is right to address these. While the general insurance market may not have the scale of problems experienced by the life market (partly because its products are shorter term and less complex), the market view of what is "fair" and the view of the FSA, may not yet be aligned. For example, the degree of embellishment in some call centre scripts may not be seen as "fair" to a customer who is making an important financial decision on a relatively complex product. Similarly, the FSA's focus on financial promotions underneath the treating customers fairly umbrella may mean that financial services companies as a whole will need to reconsider marketing campaigns, which involve celebrity endorsement or "free gift" inducements. Many insurers may think that they treat customers fairly, the question remains as to whether they can prove it to the FSA and to their customers.

What does 'treating customers fairly' mean?The FSA's requirements state that regulated firms must treat all customers fairly. It sees this as key to the running of an efficient retail market in financial services and to ensure consumer confidence. While there are no clear guidelines from the FSA as to what treating customers fairly entails in practice, there are several questions it makes sense for senior management to ask:

  • Are processes in place to identify the needs of the customer when designing and/or distributing the product?
  • Does the insurer understand the financial sophistication of its customers and tailor its literature accordingly?
  • Are suitable systems in place to ensure a customer strategy is successfully delivered?
  • What steps have been taken to ensure the complaints handling process is easy for customers to follow?
  • What management information is available to senior management to track how fairly customers are treated?
  • Treating customers fairly is an issue that will impact product development, sales and marketing, customers servicing, claims and complaints handling. It will affect most members of the executive team.Firms must look at how they operate to ensure they're not exposed to charges of treating customers unfairly. The key is to show that you have taken steps to ensure you're treating customers fairly. Areas to look at include:

    Sales :

  • Are the levels of sales incentive offered to call centre staff and intermediaries appropriately structured?
  • Are exclusions clearly spelt our at the point of sale?
  • Renewals:

  • Are the reasons for price increases explained in any renewal communications?
  • Claims:

  • What steps do insurers take to ensure their agents within the claims process treat customers fairly?