Sarah Harding says the FSA is ready to get tough with the brokers that have not made progress in embedding the Treating Customers Fairly principlesF

In May this year, the FSA published its most recent progress report on the Treating Customers Fairly (TCF) initiative. The report assessed the progress that firms had made in meeting the March 2007 deadline, which required firms to be implementing necessary change in a substantial part of their businesses.

We found that senior management were committed to their firms making progress on TCF, and were rising to the challenge of a principles-based approach to regulation.

However, given that TCF had been a priority for some time, and is a regulatory requirement under FSA Principle 6, we were disappointed that a sizeable number of firms failed to meet the deadline.

The FSA also published an insurance sector briefing in May, which revealed that some advisers are not providing sufficient ongoing advice for with-profits policyholders, and that after-sales communication documents for these and other life sector policyholders are of variable quality.

To maintain momentum, we set two further deadlines. The first is for firms by the end of March 2008 to have appropriate management information or measures in place to test whether they are treating their customers fairly. And the second is for firms by the end of December 2008 to be able to demonstrate to themselves and to us that they are consistently treating their customers fairly. Meeting these deadlines will require sustained focus and commitment from senior management.

For those firms that are failing to take their obligations seriously, the message is clear and tough – they will face more regulatory intervention.

The FSA believes these firms have failed to take the fair treatment of customers seriously. We will, therefore, increase the focus and intensity of our supervisory approach for these firms.

A targeted approach will be taken, which will depend on the reasons why a firm failed to meet the deadline, and the scale of the task it faces in filling the gap. Our follow-up work is likely to have significant cost implications for these firms.

For relationship-managed firms, we will, for example, use tools such as requiring skilled persons’ reports, imposing demanding risk mitigation plans with challenging deadlines, and rigorously reviewing and monitoring progress.

These deadlines are vital if we are to deliver fair outcomes for consumers. We want to see real change in firms’ behaviours so that fairer consumer outcomes are achieved across the industry. Many firms will have to undertake a substantial amount of work before the fair treatment of customers is embedded throughout their business. They need to demonstrate to themselves and to us how they are treating their customers and whether they are delivering fair outcomes.

This will require firms collecting management information (MI) which is proportionate to their size and nature.

“For those firms that are failing to take their obligations seriously, the message is clear and tough – they will face more regulatory intervention

Sarah Harding, FSA

In July we published a guide to management information which provided firms with guidance on gathering and using MI, including examples of good and bad practice, and illustrations to help them understand the use of MI in the context of TCF.

We are currently developing a framework which will enable us to assess if the MI that firms have in place is appropriate to testing whether they are treating customers fairly.

The FSA also set out its TCF culture framework in a paper published in July, which has been developed for supervisors to use when assessing the risk a firm's culture presents to treating its customers fairly.

The framework is based on six key drivers: leadership; strategy; decision making and challenge; controls; performance management; and reward.

We believe that the culture framework will help senior management in firms to understand some of the root causes of unfair outcomes, and therefore reduce the risk that customers are treated unfairly.

As we have said, the FSA will take tough action against those firms that fail to meet our deadlines. But for those firms that rise to the challenge, there will be a regulatory dividend as we will significantly reduce the level of testing we carry out on them.

TCF is an important example of how the FSA’s principles-based regulation works in practice.

We will continue to place the onus on senior management to ensure that their firms deliver on their regulatory obligations – determining for themselves how to deliver in a way that best suits their businesses.

Much progress has been made, but we have reached a turning point in the work on TCF. We now expect senior management to ensure that their firms are consistently delivering fair outcomes for consumers.

Sarah Harding is FSA manager of TCF