Andrew Holt assesses the true impact of the FSA's Treating Customers Fairly policy

The FSA's Treating Customer Fairly initiative is an abomination devised by under worked mandarins who seem to want to suffocate business.

How else can it be explained? And why would any broker or insurer think of treating customers unfairly in the highly competitive world of general insurance?

Within the insurance industry the distribution (broker) channel and supply (insurer) channel are highly competitive. If a broker or insurer doesn't treat its customers fairly then that customer won't be back. Simple as that.

Biba's chief executive Eric Galbraith says: "As a long serving broker in the industry, customers always come first. It is a very competitive environment and raising treating customers fairly is unnecessary."

But the FSA is so deluded that it thinks it can quantify how businesses should treat their customers fairly. So it was with the launch of its Treating Customers Fairly (TCF) document in July last year, the FSA set out its basic principles, which will be updated and assessed with its analysis of the market at the time of the Biba Conference.

The FSA's campaign arises from the observation that customer fairness best practices are not the first thing on the mind of a financial company.

The FSA's Treating Customers Fairly initiative states: "We have seen cases of firms across the retail financial services market developing products without assessing the risks to target customer sector and reward systems which incentivise the sales force to meet volume targets without measuring the suitability and the quality of those sales.

Split-capital trusts

"In the worst cases, such shortcomings have led to major cases of mis-selling, most recently of precipice bonds and split capital investment trusts."

And it is the mis-selling within the life and pensions market that has resulted in the general insurance industry having to suffer the wrath of the FSA as a result.

The whole approach creates yet more bureaucracy. It has been suggested that brokers need to deal with pages and pages of background for each product. How does that help the customer?

One regional broker says: "This is becoming a big paper trail where you have to do a great deal more work for no extra business benefit."

So where does the FSA draw the line on a hard sell? How does it know what is an unsuitable financial product? It cannot be everywhere all the time making judgments?

In part recognition of this conundrum, the FSA does at least recognise that a blend of regulatory and market-based solutions is needed to deliver fairness to customers.

"We already use a range of tools such as authorisation, standard setting, supervision and enforcement.

"We are planning to improve the existing regime by introducing clear and relevant point of sale documents to be branded 'key facts' and other consumer protection measures," states the FSA Treating the Customer Fairly document.

The FSA says it is reluctant to press on with ever more intrusive regulation, which it accepts could create a defensive and costly market. But haven't they contributed to that already?

"Instead, we would prefer so see our rules supplemented by an intelligent, thoughtful, and effective implementation by firms of the high level principle that they must treat customers fairly," says the FSA.

The onus is on insurance companies to implement its own system of checks.

The FSA puts a great reliance on senior management to embed the principle of treating customers fairly in their corporate strategy and culture.

"We expect firms' senior management to assess their current performance against the requirements to treat customers fairly, identify possible areas for improvement and ensure that the principle of fairness is embedded throughout their firm and culture," says the FSA.

A new paper is due out now on how companies have been implementing the fairness policy. "We need to develop a better, and common, understanding of what TCF means in practice," admits the FSA. The whole of the insurance industry can agree with that.

The lack of clarity in the FSA's Treating Customers Fairly rules have sparked concerns that the regulator will require firms to treat customers "generously" rather than just fairly. Martin Shaw, director of the raising standards scheme at the ABI, says: "I don't rule out the possibility of some problems, as treating the customers fairly is so ill-defined. This is a learning curve, and as a definition becomes more solid companies are concerned that it may not be about treating companies fairly, but generously."

FSA director of major retail groups, Oliver Page, went on the war path in February to drive home his message that firms have more to do to deliver the treating the customer fairly principle.

"There is still a long way to go before we reach our goal, which is to persuade the senior managements of all firms to accept their responsibility for their firm's delivery of these principles.

Operating model

"This will be done by management taking the lead in their firms, ensuring they drive their organisation to think through how to ensure treating customers fairly is built consistently into the operating model and culture of all aspects of the business to produce fairer outcomes for customers.

"At this stage, we do not expect to find all firms having fully embedded treating customers fairly throughout their business, but we would expect to find that they have started to analyse how they will ensure it is delivered and over what period.

"So far, we have mainly focused on larger firms, but our focus is widening to encompass smaller firms and businesses and will widen further over time." Even for Royal & SunAlliance, which has appointed Rob Hayes as its grandly-named customer champion, it is more to do with the internal business not Treating Customers Fairly.

Hayes says: "We have taken a practical view. Regulation is a reality and the FSA is beginning to look at what is fairness.

"And we have not really measured what is treating customers fairly, do we need clearer principles? And I think the answer is yes."

Freedom to interpret

But then he qualifies this by emphasising the last thing the industry needs is more FSA dogma.

"We do not want a set of FSA rules saying you must do this and must do that. I am quite happy with the principles approach, because that gives us freedom to interpret them in a way suitable to a particular business requirement."

The FSA doesn't seem to care it is doing the industry no favours by creating so much uncertainty and extra bureaucracy. The FSA could create instant clarity and flexibility by binning this unnecessary initiative.


A report by Deloitte & Touche says that the insurance industry will take the brunt of the avalanche of regulation from the FSA.

Author of the report Chris Gentle says: "In terms of the immediate burden of regulation, it appears that insurance companies have the most to bear. Although the FSA's rules have been set, the insurance regulations in Europe are still being decided." But he argues: "Companies should integrate treating customers fairly into their corporate strategy rather than delegating this to the compliance department.

"Insurance companies should in effect regard ensuring fairness as a form of risk management." And like the FSA he puts more emphasis on management. "To meet FSA requirements for fair treatment of customers, management need to convert organisations from being sales to service driven."

He also has a major warning for the insurance industry. "We would conclude that there is a degree of complacency at senior levels regarding the level of compliance with Treating Customers Fairly.

"If firms do not satisfy the FSA that they are meeting its Treating Customers Fairly principles, there may be a more detailed regulations to come".