With a sizeable number of companies missing the March deadline for implementing the treating customers fairly regime, Simon Burgess says the FSA must do more to ensure businesses comply with the changing environment

I?t is funny that despite the importance of clarity as a central tenet to regulation, mixed messages continue to flow from the FSA as it updates the market about the progress being made on treating customers fairly (TCF).

The last thing the FSA wants is a regulatory revolt where firms simply ignore it en masse and hope its stretched resource will let them get away with large scale non compliance.

Successful regulation is about making firms believe in the benefits that regulation will drive, and the punishments that will befall those who refuse to toe the line. For this reason it becomes very difficult for the regulator to go public with any problems it has with industry compliance, especially where it occurs in large numbers.

It seems that this, in part, lies behind the way the FSA has chosen to communicate with the market over its TCF progress report.

Sarah Wilson, the FSA director responsible for TCF, says: “We are encouraged that senior management in many firms are showing strong commitment to TCF and are rising to the challenge of a more principles-based approach to regulation.”

This all sounds very encouraging, especially when around 90% of major and medium sized retail firms have met this year’s end of March deadline to introduce significant TCF changes to their businesses.

However less than three quarters of the wholesale firms involved with TCF had managed to hit the deadline and for smaller firms the figure was a woeful 41%. Why Wilson thinks this is encouraging is a mystery.

Indeed, it seems as though she feels the small business category can soon be licked into shape and is almost incidental commenting: “Given their size and structure these firms can make rapid progress if they engage.” Whether they engage, however, is the moot point.

In the official publication released by the regulator on its findings into TCF progress, the language was not quite so upbeat, to say the least. It stated: “Given that TCF has been a priority for some time, we are disappointed that a sizeable number of firms failed to meet our March deadline.”

Indeed the report went on to say: “We can place limited reliance on senior management in these firms, and will intensify our supervisory focus accordingly.” So what’s the truth? Is the FSA encouraged, disappointed or simply confused?

The regulator should not seek to talk up the disappointing performance of smaller firms over TCF and should rather get them on board as soon as possible before they do the kind of damage that begins to undermine the regulator’s stance, creating negative publicity over the effectiveness of the regime that has been put in place.

The extra tools, resource and support being introduced to help smaller firms are welcome, but it is also important to make them aware that non-compliance with the TCF principles will not be tolerated and the potential implications are too dangerous for consumers to allow the FSA to take any chances.

It is for this reason that it is disappointing to see the FSA issue a deadline of December 2008 by which time firms must be able to demonstrate that they consistently treat their customers fairly.

If the small firms are able to move quickly on this, as Wilson has intimated, and the bigger firms have already shown a willingness to implement TCF into their businesses, then why is the market being given a deadline that is more than a year and a half down the line?

What sort of urgency will that create? Surely there will be a number of firms who are falling well short and will be delighted to hear there is little rush to put their house in order. For those who have spent time, money and resource making sure they operate in harmony with TCF principles, they will not be happy that others are being allowed to prevaricate in this manner and who would blame them?

Letting market regulation evolve is one thing, but letting it drag is another matter entirely and there is a feeling that a number of targets and deadlines could be significantly tightened to drive better results for everyone concerned.

This is especially true at a time when the regulator is looking to move its entire regime to a more principles-based approach. If firms are lagging behind on TCF, then what sort of response will there be when every aspect of a firm’s regulation is controlled by a number of overriding principles, rather than a detailed set of rules.

The problem is that those firms that embrace the principles and commit to them will make the change quickly. However those that do not will fall behind as we have already seen happen with TCF.

By moving the entire regime to a principles-led approach, the regulator risks magnifying the gap between the firms who take it on board quickly and those who do not. It could then end up in a situation where firms are operating from completely different levels of compliance, weakening the overall impact of the FSA’s work.

This is why the FSA must be firm in its appraisal of how its charges are responding to the changing environment and set tight deadlines for businesses to meet. Of course the aim should not be to make it impossible for businesses to comply, but equally they should not be given the latitude to languish.

What we need is clear direction from the regulator and a consistent message that firms understand. Muddying the waters and taking an overly relaxed stance on firms failing to meet its standards will not be helpful given the mountain of change that lies ahead.

Firms have already been given a good deal of time to get used to TCF and they should now be in a position to clearly show the progress they have made. Chasing up those that can’t must be a priority and will help drive compliance across the market.