Getting seriously fair

Brokers must give due attention to Treating Customers Fairly (TCF).

It is positioned squarely at the centre of the FSA regulatory strategy.

It affects every aspect of business operations. It is the responsibility of principals, chief executives, directors and their managers. It cannot be delegated. It is not going away.

In recent months it has become apparent just how central TCF is to FSA thinking. At the same time, it has also become clear that many brokers (and others within the regulatory ambit) have failed to appreciate how much weight TCF carries.

Perhaps it is the fault of the language: 'fairly' is an imprecise word.

And even if you take it at face value, who would ever construct a business model predicated on treating customers unfairly? What precisely is the FSA driving at?

TCF, we can conclude is inclusive. It seems straightforward, even simplistic.

But it permeates every facet of an organisation, both on a day-to-day, practical level, and in terms of corporate culture. That said, we can distil a core message: brokers must orientate their businesses so as not be detrimental to consumers.

But this brings us back to one of the main issues with TCF. Most brokers believe they already treat their customers fairly. This is leading them to conclude that TCF is directed at other less scrupulous, less ethical, less professional firms. Research commissioned by the Faculty of Insurance Broking showed that one in four brokers feels TCF is not something it need worry about.

That is a worry in itself. It is dangerous to make assumptions about TCF. The FSA expects brokers to undertake a thorough gap analysis to ensure they are treating customers fairly. It is simply not good enough to assume that you are meeting the requirements just because you do not receive any complaints.

Only 2% of those in the faculty survey have used the sort of analysis techniques the FSA is demanding. Thus TCF is threatening to become a compliance issue in terms of the way it is being measured, not just in terms of what the actual measurements reveal.

It is worth reiterating that TCF begins in the boardroom, ends with the customer and affects everything between. Some brokers, however, are viewing it purely in terms of the advice and sales process and are neglecting areas such as product design, claims and complaints-handling.

The FSA is alert to potential shortcomings. At this year's CII Conference, FSA managing director of retail markets Clive Briault suggested the intermediary market could do better. All 'arrow' visits from now onwards will carry a TCF theme. We have been warned, the FSA will be looking for evidence that a process has been followed to identify issues.

But it will serve us well not to linger over the negative aspects of TCF. The FSA has effectively given us the option, via TCF, to pursue self-regulation within the current regulatory framework. If we fail to grasp the nettle, we risk a much more prescriptive regime, where strict rules are laid down to cover every aspect of what we do.

Principle-based

As things stand, the FSA is committed to a principle-based approach to regulation in general and TCF in particular. The key principle is No 6: "A firm must pay due regard to the interests of its customers and must treat them fairly."

Other relevant principles are: No 1: "A firm must conduct its business with integrity." No 7: "A firm must have due regard to the information needs of its clients. And it must communicate information to them in a way that is clear, fair, and not misleading." No 8: "A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client." No 9: "A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely on its judgment."

Let us not forget that 'fairness' acts in all directions. It operates to the benefit of your customers, but you should adopt the same standards when considering the interests of your shareholders or other stakeholders.

We need to drill down into the overall concept of TCF to decide what is appropriate for a firm. The first thing is to assign boardroom responsibility, because the buck stops there. Processes need to be put in place to determine any gaps between what the business is doing today and what it should be doing according to TCF precepts.

Beyond this, there should be a management structure that ensures progress is being made to implement TCF throughout the business. Larger firms may have dedicated resource available to them in terms of compliance including allocation to an FSA supervisor. But smaller brokers cannot use their size as an excuse. The FSA will be undertaking schematic work to assess what actions are being taken among this group of firms.

The expectation is that all firms look at all parts of their operations and examine each function to establish whether the activity could be unfair to any of its customers or stakeholders. The risk assessment resulting from this process can then be used to establish a plan to deal with any identified weaknesses.

'Arrow' visits will focus on the risks that a firm needs to manage. Being able to produce details of a risk assessment, and then showing the planned implementation of an action plan, is strong evidence to offer if the FSA asks what you are doing.

TCF creates a need for management information to help identify, monitor and control risk. Consider product design. You may not manufacture the products you sell, but you need to monitor how they work to satisfy your customer's needs. And brokers can act as an effective conduit to feed information back to insurers.

Consider HR. Does your remuneration strategy encourage product bias, pressure-selling or inappropriate advice? If you have performance targets, are they detrimental to customer service? Is the emphasis on the number of phone calls handled rather than on the quality of customer service?

Consider complaints-handling. How are staff involved in dealing with disputes incentivised and remunerated? How does the management information generated by complaints feed into areas such as product design and sales?

High standards

And what about you as an individual? The prominence given to TCF by the FSA emphasises the importance of high standards in professional life.

This aligns with the CII's objectives. As a professional body, we promote the highest professional and ethical standards, articulating them in our Code of Ethics and Conduct and all members have an important role in their promotion.

The CII has issued guidance notes covering TCF (in a series of eight factsheets) and Conflicts of Interest - another area being looked at closely by the FSA. TCF is addressed in our exams syllabuses, within our online brokerASSESS competency tool, via CPD events and face-to-face training courses. It is pivotal to our new job role and competency framework.

The other reason to be supportive of TCF is that it is good for business.

It ensures we are vigilant regarding the effectiveness and ethical standing of our organisations. It ensures we keep pace with rising customer expectations.

It also enhances business performance. Research has shown that by reducing customer defection by 5%, overall profitability can increase by 25%. Similarly, staff empowerment can reduce the total cost of customer service by 15%.

Up to 30% of your profit may come from 1% of your customers, but chances are you don't know who those customers are. TCF will help you find out.