Insurance Times held a public debate on Treating Customers Fairly (TCF), the FSA’s principles-based approach to regulation. Chris Lewis, from the BBC’s Moneybox programme chaired the proceedings, and a panel of experts gave their views
Alexandra Peterkin, director, FSA Solutions: Principles like TCF are commendable ideals, but without some detailed guidance there can never be any consistency in what this actually means. How does the panel think that the FSA or, indeed, the industry trade bodies, can best provide such guidance?
Ian Holloway: There is a basic direction in which the industry can choose to go here. It can either choose to go down the principles ?based route, or it can choose to be bound by some quite detailed rule sets, which is where I think we are currently. There is no doubt that the industry as a whole favours the principles-?based route. There is some guidance in terms of how we need to support that, which I think is best coming in fairly small quantities from our trade bodies, ABI, Biba, and the various banking organisations. However, I would stress the level of guidance we would require is generally quite small and on specific areas. PPI is a current example of where we are working on providing key information to explain the documents better to customers. In my view, the bulk of the responsibility for interpreting principles put out by the FSA actually rests with the regulated firm. The challenge for us as regulated firms is to take the principles and interpret what they mean in our businesses.
Helen Melican: The feedback we have had from members on the role of industry guidance in a principles-?based regime echoes what Ian has said. Basically, members are not looking for us to replace whatever parts of the rule book the FSA gets rid of. Indeed, they have been very clear that they do not want the ABI to be a quasi-?regulator. However, there is an appetite for producing guidance. It is worth saying that the ABI guidance is produced with working groups of practitioners, so it should always be relevant and add most value. The aim is help members by providing useful resources, but not to be prescriptive in a way that replaces the rules or implies that there is only one way. The feedback from members thus far indicates that they want flexibility and freedom to decide how best to treat their own customers fairly.
Dick Tucker: I agree with both Ian and Helen. We are Biba members and we certainly would not want Biba to be a pseudo-?regulator. It is important that it provides guidance on the broking side and offers that in an independent way. We also use them as a mouthpiece for the broking industry, such that if we have issues with the FSA we want Biba to voice our opinions.
Paul Lewis:When the FSA looked at the extent to which companies had met the March deadline for introducing TCF, it found only 41% of small firms had met it versus 93% of the major retail groups. It is clearly an issue for small firms and a subject we may come on to once I have brought in Simon Burgess. Simon, you have been very critical of several of your colleagues in the industry for how they treat customers, how do you deal with this yourself?
Simon Burgess: I have been very critical, but only in a certain market segment. As a whole, the British insurance industry serves its customers extremely well. There are very few complaints compared to the number of insurance policies transacted. TCF is a wonderful concept, but companies do find it particularly difficult to define whether they are treating customers fairly or not. As a small broker, I would find it very helpful to have guidance and assistance on the definition of when a customer is not being treated fairly. Examples and communications from trade bodies or certainly the FSA would greatly help in this respect.
Lewis: As there is no ?one here from the FSA, I will point out that in the document it published in May it said it offer materials on principles?-based regulation and TCF on its small firms website. The website is a popular resource that receives 50,000 visits a month. Have any of you had experience of this website? Is it something you find useful?
Peterkin: It is certainly an excellent source of questions. But not answers. One of the reasons for my question is that having been around the industry a long time I do appreciate that there will be many companies that will follow an excellent TCF model, but there will also always be those firms who choose not to. One of the biggest issues for firms at the moment is to understand the difference between their own view of treating customers fairly and when others feel that they are not.
Lewis: Do you not think the sector? specific self ?assessment tools that have been promised towards the end of the year will help?
Peterkin: The tools will help organisations to assess whether or not their people understand what TCF is and whether or not they are ticking all the boxes on the checklist. Nonetheless, they will not help the approved persons in an organisation say with any authority that their business is treating all their customers fairly and that their corporate values are being reflected in the way they respond to their business issues.
Paul Lewis: I mentioned small firms and that the FSA research shows that only 41% had met the March deadline.
Darryl Halliwell, Travel Insurance Facilities: I query the figures because I am not aware that the FSA has ever been around to ask everybody. It must have been a very small sample.
Lewis: 273 out of a sample of 659 directly authorised small firms had met the deadline, which is 41%. Just over 1,000 firms were in the survey, so it was quite a reasonable number in survey terms, but a small fraction of the total, I am sure.
Halliwell: The figures are very misleading. Probably a far greater number have complied.
Mike Clarkson, Insurance Service Manager, Stewardship: We have complied as far as we are aware, but the problem is how to assess whether we can be certain beyond just saying ‘as far as we are aware’. The FSA website is improving, and the FSA is producing some newsletters about what it considers to be good practice and bad practice from the various visits it has made to different sizes of brokers and insurers. How do you ensure that you are reviewing it sufficiently to make sure you are complying? That is the biggest problem I have. It is a very large burden on a small business in terms of trying to work out exactly what it should be doing.
I am also sceptical about the figures the FSA gave. I am fairly sure that most people started the process fairly promptly from the early days when we had all the wonderful little diagrams to look at about how we could go about this.
Jerry Beere, partner, Morton Michel Insurance: What are the TCF implications for brokers with delegated schemes from two different insurance companies? Will they have to meet any particular TCF requirements? One can see a potential conflict there. You could sell a customer either policy, but what happens if the policies are broadly similar and one is cheaper? Does TCF require that you must put forward the cheapest one? The other implication would be if you were making unadvised sales.
Burgess: A broker is almost in a no-?win situation in circumstances such as that. Clearly, one would want to give advice that the policies one offers are those best suited to the client, which can be done by undertaking research on the various policies on offer, perhaps through a research house such as Defaqto. However, if one is dealing with a situation where the policies are broadly similar there are other factors that go into the mix for consideration, and price is certainly one of those. It would raise serious alarms to me if there were broadly similar offerings and there was a price variation. There would certainly be concerns if one were to offer a product that was more expensive without at least running the options by the client.
Tucker: I guess these will be annual policies so one of the options is to look at both schemes and decide which is the best and most suitable for the client, then you could put one into run?-off and retain the other. That takes away the issue, albeit over a 12-month period. I would see that as being one of the best solutions. Alternatively, I guess they are from two different insurers, so you would look at them and see whether you could make them complementary in terms of one covering one type of risk for a client with a particular issue.
Lewis: The dilemma that Jerry is putting forward is that if you really have two identical products, do you have to go on price and is that the only way to treat customers fairly?
Melican: Price is obviously one of the considerations that customers will be interested in. I reiterate what has already been said in terms of TCF being about the customer and putting the customer at the heart of business decisions. There is much to be said for transparency with the customer and giving adequate explanations. For instance, if two policies are virtually identical and the only real difference is the price, you should be upfront about explaining that.
Lewis: What about declaring commission? Where does the ABI stand on that?
Melican: We are always in favour of transparency for the customer. We have not taken a view either way on whether commission disclosure should be mandatory. We are still talking to our members about that. Obviously, there is already a provision for that as part of agency law as well as the ICOB rules, whereby if a customer asks for the commission to be disclosed, under certain circumstances that has to be done.
Holloway: I suppose there is nothing really new in the TCF regime apart from the law of agency, which has always existed. There is a very clear understanding that a broker acts on behalf of their customer and therefore must be able to justify the decisions that are made on the customer’s behalf. If you have two competing products there is a whole range of considerations the broker must take into account in terms of service, terms and conditions, and price. Price is obviously an important consideration, but it is not the only one. You must also be able to justify that decision retrospectively.
“Our understanding is that the FSA is being very clear that it is not an enforcement-led regulator, so it would be looking to resolve problems through the supervisory process rather than entering the formal enforcement process
Helen Melican, ABI
Lewis: Airmic is moving towards having an index of insurers’ willingness to pay, which would certainly be a factor for many people. The premiums might be the same, but will the insurer pay up if there is a claim, and how well will they pay up? I thought that was quite an interesting move. I think Aon has backed it. Does AXA back that?
Holloway: We will certainly give it due consideration.
Beere: There is also the notion of the client having access to a free market. Other people could be selling a similar policy, so why can they not just go and find another broker who is willing to sell a similar policy from another underwriter?
Holloway: We talked about transparency and I think it is worth making the point that there is a requirement that the customer understands the basis upon which you are operating. Are you operating solus? Are you operating on the basis of a panel? Are you operating for the whole market? It is a fundamental TCF requirement to disclose that, as well as a rule requirement.
Beere: If you have put the details in the renewal letter then I do not really see what the problem is. You make it clear that it is up to them to make their own decision.
Karen Freer, proprietor, Freers Resources: In cases where there is a disagreement with the FSA on whether the TCF rules have been broken, what are the behind?-the?-scenes processes that the FSA will employ to decide the issue? It would be helpful if the FSA could be clear in advance about the procedures it follows in situations like this.
Melican: It is worth giving the FSA some credit where it is due in terms of TCF because it has made it re?think its supervisory policy and look at TCF as a precursor for principles-?based regulation in general. Instead of purely acknowledging matters it is taking action to make sure supervisors and their supervisory approach reflect the judgment that has to be made by firms, and is less of a tick?box detailed role, as well as being far more flexible.
This question also plays into the points made earlier about small firms. Obviously, if you have a direct supervisory relationship with the FSA, in other words a kind of managed relationship, there is a lot of dialogue that goes on. Where issues arise, you are meant to be able to discuss them with your supervisor. Obviously, for a smaller firm that does not have that direct relationship with the FSA it can be harder. However, through its desk-based approach the FSA will be approaching you if it feels there are issues that have arisen, and that would be an opportunity to talk through exactly what its concerns were and discuss possible solutions to the problems it is raising.
Our understanding is that the FSA is being very clear that it is not an enforcement-led regulator, so it would be looking to resolve problems through the supervisory process rather than entering the formal enforcement process. The basic point is to try to talk to the financial services as soon as possible. If you feel aggrieved about a decision that has been made by a supervisor or the staff you have been talking to.
Freer: My question was really about what firms can do internally between departments to discuss an issue where there is perhaps a very grey area.
Lewis: Do you mean in departments within a firm?
Freer: I mean within the FSA.
Holloway: There is a documented process on the FSA’s website for specific guidance that you can use if there is a genuine lack of clarity, but it is fairly time consuming as I have discovered when I went through it. The other process is in terms of waivers. It is always worth all of us looking at the waivers that have been granted to firms so you can see some of the queries where perhaps the rules have not quite worked at the moment. In terms of enforcement, there is a more general question here.
Lewis: I read something today from the law firm, Reynolds Porter Chamberlain, that with 40% of all fines imposed by the FSA in the last 12 months TCF breaches now featured in those. I understand what you are saying that there is something specific as well, such as the recent one with Kilminster, an investment company rather than a broker, with management failings, complaints handling, and hence a failure to treat customers fairly. People have to get it right because ultimately they could be fined for something involving not treating customers fairly. It is obviously very important. They were also very critical of the fact that it is all too vague and that by refusing to define or provide guidelines it is causing a headache, which I think everyone here would probably agree with.
Tucker: The first thing to remember is that there is Principle 6 for business, which is about treating customers fairly. Consequently, it is not surprising that the FSA does talk about TCF in some of its enforcement actions because it will always go back to one of those principles of business, or more than one if more than one has not been enacted. My concern goes back to the small firms in terms of this process and the issues about trying to find out about TCF. The main contact point for small firms at the FSA is the Contact Centre. The experience for most small firms is that the Contact Centre does not always provide the right answer or indeed a good or qualified answer. There is certainly a problem for small firms, and I am not sure what the answer is other than perhaps going through a trade body and using them to help with that process. I know that Biba will help its members in that way.
My understanding of the principles-based regulation is that it does identify outcomes. There are six outcomes they are looking for under TCF. I should think that is where the supervision will come on whether you are meeting any of those outcomes, and if you are not they will consider that you are not meeting TCF. I assume that the process for supervision will follow something similar to what there is today: they will consider what you need to do, produce a mitigation report and firms would need to implement the items in that report.
Gary Paton, business development manager, Axis International Loss Adjusters
Would the panel agree that well-?managed complaints handling is comparably one of the best ways to win a customer’s confidence and loyalty?
Burgess: We have to acknowledge that with the nature of insurance things can sometimes go wrong, and often in circumstances that are beyond everyone’s control. The best way to gain confidence when things have gone wrong is to do the very best to ameliorate the situation. Dealing with a complaint in a proper and professional way and trying to get things back on the rails is the most important way to generate loyalty with one’s customers. Complaints do happen.
The insurance industry effectively is selling promises, and often because of the nature of what we do, in the contract of insurance we give there are often exclusions within the policies that customers are unaware of. When there is a situation that generates a complaint, it is most important that one deals with it. You acknowledge that things can go wrong, you explain the nature of the contract and deal with it. You manage the expectations of the customer. You explain what is possible in terms of giving guidance about what can be achieved. That has worked very well in some situations.
We have had situations where we have had complaints in our business and we have been able to turn them around completely because we have been able to manage expectations and explain what the limitations of the policy is, albeit sometimes in hindsight. You bring clients on board to explain what can be done, what the insurance is there to do and how an outcome can be found for a potentially bad situation.
Lewis: Is it more difficult for you because people buy things direct, as I understand, and you do not advise people? Is that correct?
Burgess: That is absolutely correct. It is very difficult because often in my business I find a large number of people do not know what they are buying. We do everything we can in our protocol and procedures to ensure effectively that people are buying something that they are able to claim on. However, it is not fool?proof. We can provide policy documentation, key facts, frequently asked questions, and so on, but we cannot guarantee those are read, and we certainly cannot guarantee they are understood. It is often at the claims stage where a claim is denied that we get complaints. However, if one deals with complaints in a compassionate, proper and professional way, rather than people thinking we are trying to take their money under false pretences, they can understand that we are acting as intermediaries on their behalf trying to do the best we can for them. The complaints procedure has to deal with that effectively and be seen to offer a helping hand at an appropriate time rather than stonewalling people.